A short sale is a workout plan that the banks have in place to help homeowners and the banks prevent foreclosures. During a short sale, a mortgage company agrees to accept less than the current balance on the loan amount. A negotiated short sale results in a discounted purchase price for the buyer or investor.
WHY WOULD THE BANK ACCEPT LESS?
When a bank forecloses on a home the money tied up in the mortgage becomes a nonperforming asset. Obviously they are not receiving any interest on the money tied up in the property. Having money tied up in REO’s (Real Estate Owned) properties effects the amount of money a bank can borrow from the Federal Reserve. This in turn affects how much money the bank or mortgage company has available to lend out to the public. If they’re not lending our money, they’re not making money! Every non-performing loan reduces the amount the bank can lend out so that is a huge incentive to doing short sales rather than foreclosing. The banks also look at the costs involved with foreclosing (attorney and auction fees) and then maintaining the property, continued hazard insurance, taxes and depreciating markets where the value might possibly be less in 6 months than it is today. In addition, the cost of a foreclosure is expensive.
WHY WOULD THE SELLER BOTHER WITH A SHORT SALE?
The advantage to the seller is that painful foreclosure proceedings are avoided and although there are still credit ramifications, a short sale enables a more dignified solution to financial difficulties. Current guidelines also state that a homeowner participating in a short sale can buy another home in half the time it would take if a foreclosure is on their credit report. The homeowner also has a better chance of avoiding a deficiency judgment by doing a short sale. Rather than being evicted from his home, the seller, to all appearances, has sold the home in the normal way.
SHORT SALES FOR REAL ESTATE AGENTS
What many Real Estate agents do not understand is that getting short sales approved depends on many factors. You should hire a Realtor with short sale experience. Ask your Realtor how many Short Sale listings they successfully closed or how many buyers they represented who successfully closed on a Short Sale. Knowing how to submit a Short Sale with all the correct paperwork and working with the bank’s representative is definitely a skill that you need. However, one of the major factor that many agents overlook is whether the seller “qualifies” for a Short Sale. If a seller merely desires to sell quickly, has a regular job but wants a little help to unload his home to the first low-ball offer he gets, it is highly unlikely that the bank will do a short sale. According to Freddie Mac, (http://www.freddiemac.com/news/pdf/fmwp_0403_servicing.pdf) We have the experience and proven track record with Short Sales in Virginia, Washington DC and Maryland.
Deficiency Judgments
The seller has to qualify all over again, except this time he has to prove that he
cannot make the payments. The bank will ask for corroborating documents such as tax returns, paystubs, layoff paperwork, hospital bills, divorce decrees, bank statements and more.Again from Freddie Mac, “Most lenders require an involuntary inability to pay before workouts are approved, meaning the borrower does not have the capacity to fully reinstate and carry the mortgage due to illness, job loss, significant property damage or depreciation, or other significant economic shock.” The Mortgage Forgiveness Debt Relief Act of 2007 allows the bank to report the difference to IRS but sellers are not taxed on the deficiency. Loss Mitigation departments are understaffed and overworked so it can take 30 to 60 days, sometimes longer, to get a short sale approved.
Nancy Alert,Realtor,ABR,GRI,CRS,RDCPro™
RE/MAX Allegiance
3124 N. 10th Street
Arlingotn, VA 22201
Office: 703-373-5000
Cell: 703-861-7355
