What is a “Short Sale”?
A short sale is a property that will go into foreclosure if not sold before the three month “non-payment mark” and “notice of default” is filed. When an owner is in distress and they know they can no longer afford their mortgage payment – they should contact their Realtor and their bank immediately to discuss the possibility of the bank receiving less than what is owed. The term “short sale” refers to the agreement that the bank will accept less than the amount of the loan they have on the property. This course of action is the last chance an owner has to get out of the loan and keep their head above water. A bank will not agree to a short sale if the owner has other assets they can liquidate to bring the loan current.
Why Would a Bank Accept a Short Sale?
Banks would much rather not hold foreclosed property. And in a short sale they will probably receive more money than at a foreclosure sale. However, not all owners will qualify for a short sale agreement. The circumstances around a short sale vary. For example, perhaps through a job loss or other reason they have been unable to make regular mortgage payments and that balance due plus late fees are added to the total loan amount. Suddenly the owner may owe more on their loan than the home can sell for. If the owner forecasts that they can no longer manage their monthly payments they will need to contact their bank in advance to begin negotiations. However, the owner cannot have any other assets available. If so, those resources will have to be exhausted first before the bank will agree to a short sale. In this case, before the 3-month mark of foreclosure – the owner can place the home on the market and see how much they get. The home will be listed by a Realtor and advertised as a short sale – where time is very much of the essence. Interested buyers will need to act quickly in order to purchase before foreclosure proceedings begin.
Another reason a short sale can become an option is when, due to market changes, a seller owes more on the property than it is currently worth. For example – Let’s say the owner purchased the home 2 years ago and paid top dollar for it. Since buying a home is a long-term investment; 2 years generally doesn’t give the owner time for the property to appreciate. Suddenly, for whatever reason, they are unable to make their monthly mortgage payment and cannot sell their property for what they purchased it for. They find themselves “upside down”. Meaning the market has changed and the value of the property has dropped from where it was when they purchased it. As professional Realtors – we advise our clients when purchasing a property that they will need to hold their investment for a minimum of 5 years to see appreciation. In this particular case, no matter what, the loan on the property is greater than what the home can be sold for. If the bank agrees, the home will be listed by a Realtor and advertised as a short sale where interested parities will need to act quickly before foreclosure proceedings begin.
Why Should a Buyer Consider Purchasing a Short Sale?
Because the clock is ticking on short sales – it can be very advantageous for the new buyer to purchase under these circumstances. Short sales are no fault of the property. Your Realtor will do a comparative market analysis to inform you of current home values to help you better decide your purchase price. Although disclosures and inspections may not be available for the property – the opportunity to perform inspections is allowed by the bank. Time is of the essence, so a buyer will have to act quickly. The bank has agreed for a limited time to take the highest offer received – there is the opportunity for the buyer to purchase the property at below market value – thus having instant equity.
Before you get involved with a short sale purchase or sale – consult a Real Estate Attorney and a professional Realtor.
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