What is a Short Sale or Pre-Foreclosure?
I get several phone calls on a daily basis regarding short sales and foreclosures. I take the time to discuss what each is and the pros and cons of each. It is imperative I gain a clear understanding of what the buyer or seller is looking to achieve in order to give the appropriate advice and guidance. Allow me to explain the difference between a short sale and a foreclosure, describe the process of each and share the pros and cons with you.
A short sale is when a seller owes more on the mortgage than he can sell the house for. He then asks the lender (mortgage company) to take less than what is owed.
How does a short sale work?
From the perspective of the seller –
- First, he must contact a realtor that is familiar with the process.
- Next, he fills out a short sale package (otherwise known as a hardship package). This includes a letter describing why there is a hardship, a budget, evidence of income, liabilities and tax returns. A bank will usually not even look at a short sale request unless the seller is behind on his payments. This package will be requested by the realtor from the bank. It will be necessary for the seller to write a letter to the bank authorizing the realtor to discuss the short sale on behalf of the seller.
- The home should be listed for sale. The bank likes to see a history of price reductions prior to the sale being short. They will want to see sold comparables of the property for sale to demonstrate that the seller is in fact in an “upside down” mortgage situation.
- Once a contract comes in on the property, the sellers first have to accept it then forward it to the bank for their signatures. This process can be painful! Some mortgage companies take three months or more to approve the contract. This doesn’t usually bode well for the buyer nor relieve any anxiety for the seller.
From the perspective of the buyer –
- He contacts a realtor familiar with the short sale process.
- He decides he has fallen in love with a property that has been identified as a “short sale”.
- He writes a contract with some special addendums regarding a short sale and then he waits, and waits, and waits… and waits for the bank to approve the contract. Again, this process can take up to six months.
The Benefits of a Short Sale:
From the perspective of the seller –
- He is able to remove his anxiety surrounding his inability to pay his mortgage.
- He will move on to his next step.
- His credit score will not be impacted as negatively as a foreclosure.
From the perspective of the buyer –
- He is likely to get a home under market value.
The Drawbacks of a Short Sale:
From the perspective of the seller:
- Credit will be negatively impacted
- He will not be able to buy another home right away.
- Could be IRS consequences (consult your tax accountant)
- Could take a long time to get to the closing table
- Could take a long time to get an answer from the bank
From the perspective of the buyer:
- Could take a long time to get to the closing table
- Could take a long time to get an answer from the bank.
