Real Estate Short Sales

What Is a Short Sale?

Simply put, a short sale occurs in a situation when a home owner’s debt on the property is greater than the amount for which the property can be sold. This means the lenders are willing to accept less than the total amount due. Here’s an example: Assume a homeowner has an unpaid loan balance of $120,000, but the property will only sell for $100,000. The lender accepts that $100,000 as full payment, which is obviously “short” of the full $120,000 payment.

 

Since lenders aren’t in business to lose money, you can imagine that they’re reluctant to do short sales and will often only do them as a last resort. It can make more financial sense for them to go through with a foreclosure.

Why Is a Short Sale More Complicated?

A SHORT SALE is a complicated process due to the fact that so many factors are involved: e.g., the loan mitigation policies of the lender and third-party investors; the financial condition of the same; financial condition of the borrower; the property’s as-is value; the cost to “repair” the property to put it into saleable condition and market it, etc. In addition, approval for short sale must come from the investor who actually owns the loan. Moreover, if the lender is a government-sponsored institution like Fannie Mae or Freddie Mac, approval can take a long time, given the nature of federal-type bureaucracies.

When Will Lenders Accept a Short Sale?

Sometimes, homeowners experience a devastating illness like cancer that eats up all their financial resources. Other times, homeowners are military personnel who are called up to active duty for extended periods of time and lack the income to continue mortgage payments. There are many other instances all of which fall under the “hardship” category-disabling, permanent injuries; financial insolvency; convictions; lack of employment due to economic conditions beyond the homeowner’s control, etc. In these instances, lenders are willing to consider a short sale.

How Do I Know If A Property Qualifies for a Short Sale?

In order to know if a property qualifies, you’ll need to gain knowledge. First, know the lender’s loss mitigation policy. What’s their record on dealing with short sales? If it’s seldom or never, a short sale is not worth your time. Second, know the number of liens recorded against the property title and the total amount of money in those liens. Third, know the borrower’s present financial condition. Fourth, know the type of loan that’s in default and its current status. Fifth, know both the property’s as-is market value and its as-repaired value. Sixth, and finally, be aware of the state of the local economy and the current real estate market conditions. Analyze all this information to determine if a short sale is worth pursuing.

How Do I Pursue a Short Sale?

Let’s assume you’ve done your analysis and want to pursue a short sale. The first order of business is to have the homeowner sign an authorization to release the loan information. Next, you have to have cash on hand; that’s right, all short sales are cash transactions. So, you’d better have cash available and verifiable proof that you possess the money.

 

Keep in mind that short sales cannot be made to relatives, family members, or close friends of the homeowner. In real estate terms, this is called an “arm’s length transaction.” If a short sale transaction is completed and a lender later finds out that, say, the homeowner’s brother bought the property, then that lender can file a lawsuit to have the sale overturned.

 

Another obstacle to a short sale is the property owners themselves. They can’t receive any of the money from a short payoff sale. After all, why should they be rewarded for financial irresponsibility? So, there’s little incentive for them to do a short sale. There’s also another negative; the debt that’s canceled by the short sale payoff of a mortgage or deed of trust is subject to federal income tax as ordinary earned income. This is not true of a bankruptcy or insolvency.

How Is a Short Sale Property Appraised to Determine Its Value?

It’s done through the process of “broker’s price opinion” (BPO). These are oral or written appraisals done by real estate licensees licensed to do such actions. Lenders use BPOs to determine two things: a property’s as-is value and its as-repaired value.

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