DISCLAIMER

Here's where I confess that I am by no means an expert on short sales, and say that the banks and mortgage companies are not so sure how to handle these, either.  Two years ago, most of us had not heard the term.  In 2011 the corporate owners are trying to figure out how to best handle this growing phenomenon.   Also, as with all of the information I present on this site, all of my experience is based on Georgia real estate.  I do not list short sales or foreclosures, so much of my advice is for home buyers.

WHAT IS A SHORT SALE?

Basically, a short sale is when the mortgage company or bank agrees to a loan payoff that is lower than what is owed on the property.   I'll try to cover this complicated situation from the buyer's and the seller's point of view, and will try to update as the market changes.

SELLER'S POINT OF VIEW

If you are a seller who is in default on your loan (first or second mortgage, or both), financial experts advise that you contact your lender(s) and try to negotiated more favorable terms to enable you to remain in your home and make the payments.  Not all lenders will agree, but there's nothing to lose in trying.

If the lender refuses to negotiate the terms, or if you will be unable to continue to make the payments under any circumstances, you should ask your lender for a seller package to request approval for a short sale.  These are detailed documents which clearly demonstrate your inability to make your mortgage payments.  Typically, the lender will not consider a short sale until the owner is in default.

 Since this is new territory for lenders, each lender approaches short sales differently.  In many cases, the lender will not make a commitment until the home is appraised, listed, and an purchase offer is presented to the assets manager.  That may leave the seller, buyer, and real estate agents in limbo, sometimes for several weeks. Other lenders will agree to a short sale in the beginning of the process, and will disclose to the seller and listing broker the minimum amount that would be accepted. 

If your lender agrees to accept a short sale, make sure that you are released from any further liability after closing.  Also, be aware that your release of liability to the lender may not absolve you of your tax liability for the amount deferred.

Also, be aware that the effects of a short sale on the seller's credit report is close to the effects of a foreclosure.  I recently read a quote from a loan officer who said that the difference in impact on FICO score between a foreclosure and a short sale is like the difference between being hit by a train vs. a bus.

BUYER'S POINT OF VIEW

You may have gathered that the market is being flooded with short sales and foreclosures.  Buying a foreclosure is more predictable.  You'll usually get a "yes" or "no" answer from the lender's assets manager within a week.  With a short sale, be prepared to wait up to several weeks for an answer....and the answer may be "no."  Keep in mind that lenders are already losing money, so don't expect them to give the house to you.

As with foreclosures, short sale homes are sold "as is" with no repairs.  You'll want to have an independent home inspection, termite inspection, etc., and be willing to walk away if the property requires more work and money than you are ready to give. 

Some corporate owners will pay closing costs, but many will only give a concession in a price reduction.   Expect to deposit  1% to 3% in earnest money. 

Read my advice on buying a  FORECLOSURE, because some of the advice also applies to Short Sales.


UPDATED JANUARY 2011

One of the most prevalent obstacles to the successful completion of a short sale is a second mortgage lender. While all first mortgage lenders agree to absolve the seller of further obligation, second mortgage holders may not. This scenario is common and is affecting a lot of closings at the last minute.


LIST PRICE AND BIDDING

The Seller/Owner reviews and accepts the offer (or offers), and then the offer is forwarded to the Assets Manager for the first mortgage holder. The prospective buyer MUST be fully approved pending appraisal and submit a loan approval letter and earnest money in certified funds with the offer.

The list price may be far below what the lender would accept. Keep in mind that lenders are already losing money, so don't expect them to give the house to you. It is typical for a buyer to be bidding against other buyers, and if an offer is accepted, it will be the strongest offer, possibly far above the list price. The "also rans" may never know why their bids were not accepted.

Some corporate owners will pay closing costs, but many will only give a concession in a price reduction. Expect to deposit 1% to 3% in certified funds in earnest money.

SOLD "AS IS'

As with foreclosures, short sale homes are sold "as is" with no repairs. You'll want to have an independent home inspection, termite inspection, etc., and be willing to walk away if the property requires more work and money than you are ready to give. You may be responsible for causing The utilities to be turned on for your inspection, including paying a fee to the utility companies if required.