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Real Estate Insider: Short sales – truth and fiction

By   /   February 25, 2013  /   Be the first to comment

Chris Woodard

Chris Woodard

The real estate industry has seen a record number of short sales over the past few years. For both buyers and sellers, there’s a lot of confusion about what, exactly, a short sale is. When a seller sells a property that is “underwater” — meaning they owe the bank more than the property will fetch on the market — the bank is paid “short.”

A short sale may be a good opportunity for a buyer to pick up a piece of property at a great price, and for a seller, it is often a better way to get out from under than a foreclosure. But a short sale is very different from a conventional sale. And the one thing that a short sale is not, is short.

You want to hire an agent who is experienced with short sales, who will list the house aggressively: at, or even below market value, and find a buyer. Even with a well-priced property this can take some time. Short sales have a stigma attached to them because buyers know that banks will take their time to approve the sale. Investors seem to prefer foreclosures to short sales at a rate of about three-to-one. With a foreclosure, they know that the deal will close within weeks. They stay away from short sales because there are so many moving parts, and investors want to keep their money moving.

Once you have an interested buyer on a short sale, you take the offer to the seller who agrees to it before it goes to the bank. The seller has to fill out a lot of required paperwork as well as submit a hardship letter explaining their financial situation. Then everyone has to hang out and be patient, because this will take some time. Best case scenario, 90-120 days. Worse case? I know of one that is about to celebrate its second anniversary. Ironically, once the bank finally approves the sale, they usually want it closed quickly, and the buyer is left scrambling to get their financing in order.

If I have a client whose mortgage is underwater, I would always encourage a short sale before letting the bank foreclose. Yes, a short sale is a long and frustrating process, and the seller has to open himself up and be forthcoming with a lot of personal information. But a foreclosure sends the message that you aren’t even trying.  You are not giving the bank a chance to mitigate their loss. For this reason most banks will typically give a full release on a seller’s remaining debt, because the seller made a good-faith effort to take the responsibility for their financial situation—even if the circumstances were beyond their control.

Yes, your credit rating will take a hit after short sale, but it will be far better than a foreclosure. Typically when you get through a short sale you can get financing again in two years. After a foreclosure, no government-backed financing will touch you for five years—if not more. Also, a foreclosure does not prevent your bank from coming after you, getting a judgement against you, or attaching your wages. You are never released from the obligation to repay that debt, unless you file for bankruptcy.  With a short sale, the bank typically forgives your debt and gives you a 1099 form in the amount of the forgiven debt.

As a buyer interested in a short sale, before you enter into a contract make sure you are working with a professional negotiator, and all sellers are cooperating. Short sales often happen in the middle of a divorce, or other situations where emotions may be running high. The buyer needs to understand it’s a long-term deal. Be ready to take all the patience you have accumulated over the years, put it in a bucket, and take it out little by little.  You’ll need all of it before the deal’s done.

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