Archive | March, 2012

What Is a Short Sale? Knowing The Basics

March 8, 2012

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This is a common term in business. A short sale can be viewed in two aspects; a short sale as used in stocks and a short sale as used in real estate. We shall focus on a short sale in the real estate aspect here.

In the case of a real estate short sale, there are basically three aspects in which you can look at it; the buyer’s perspective, the banker’s perspective and the seller’s perspective. The three parties play a crucial role in the short selling process.

Let us now understand short selling at a glance. As a seller, you can short sale your house if you have difficulties in making payments for your mortgage. If as a homeowner you are facing foreclosure because of difficulties in remitting the payments then the bank may consider short selling your house. In this case, the bank will take less than what is due to them. For instance, in case you owe the bank $ 1m on the house, the bank may take $9.5m and consider that loan fully paid. The other question that may arise, why should the bank consider a short sale and recover less than what is due to them? Well, in case the bank wants to foreclose the house then they will sell the home. This translates to another much involving process where they need to look for a real estate agent who will fix the property and then wait for a long time, numbering months, before it is sold. This is the reason why the bank decides to short sale so that to a property investor so that they can get the cash quickly.

In case you are a buyer who wants to purchase a home at great discounts then you should be timing a foreclosure. Just approach the owner with a well written letter when you note a home in which you are interested, stating your intentions to buy the home. Go ahead to inquire from the owner if their bank is interested in selling the home short. If the owners are solvent then they won’t hesitate to sell the home short. You could also contact a real estate agent and inform them of your intention to buy the home specifically on a short sale.

Short selling has numerous benefits to all the three parties directly involved here:

  • The owner avoids a foreclosure which normally has a greater negative effect on their credit report.
  • In case the lender participates in a short sale program that is supported by the government then they stand to benefit up to $5,000 to enable them complete that short sale.
  • A short sale certainly lessens the possibility of a current debt ensuing on the lender. In other words, a deficiency judgment is avoided.
  • It has a lesser impact on the future housing prospects of the homeowner because the homeowner can easily qualify for another mortgage after two years of the short sale in contrary to a foreclosure where one has to wait for seven years in order to qualify for another mortgage.

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Understanding The Short Sell Process

March 1, 2012

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Short sales were not in the public picture a few years ago when the prices of house were just booming. However, they have become a phenomenon of study, experimentation and practice in this current debacle and upsurge of mortgage delinquencies. Many people are therefore in a state of dilemma as to whether to engage in the short sell process as a possible solution to the deadly foreclosure. That is basically why an understanding on the short sale process is essential.

But what is a short sell in the first place? In real estate, a short sell is the process through which a lender of some property allows the property to be sold for an amount less than the total amount that is due on the mortgage loan. There are three major parties involved in the house short sell process:

  • The lender (bank in most cases)
  • The buyer
  • The seller (homeowner)

This is the short sell process:

(a)   The seller or buyer contacts the lender in order to discuss the possibility of a short sale. The lender then determines the process of the short sale by deciding on the procedure to take.

(b)   The seller or homeowner then writes a letter that authorizes the bank to release facts about the mortgage loan to the agent or the buyer.

(c)    The lender reviews the statement of settlement and proposes a selling price for the house. The lender also indicates and itemizes the remaining expenses that need to be paid on the loan, real estate commissions and any other fees associated with the house short sale.

(d)   The seller then does a letter that explains all the financial difficulties that they are facing. This letter is sometimes called a hardship letter. The lender will then, in an attempt to validate the seller’s financial situation, look at the investment accounts, bank statements and other financial records of the seller at the lender’s disposal.

(e)   The value of the house needs to be correctly established before a short sale. The lender normally hires the services of a real estate broker to provide a possible opinion on the price of the house by looking at the condition of the house and then comparing it with the market value of properties that are comparable to it.

(f)     The lender goes through the purchase agreement in order to find out if the amount stated and the commissions indicated are reasonable. If the lender is satisfied with these details then the house can be short sold.

The short sale process can be lengthy because one has to contact several people here and there before striking the deal. As such, several documents and a virtue of utmost good faith from the seller are required. Nevertheless, if the short sale process is carried out carefully and the steps followed correctly, there are benefits accruing to all the parties involved:

  • The lender sells the house at a fair market price without having to wait for several months.
  • The buyer obtains the house at a relatively lower price than its market price.
  • The seller gets out of the house honorably and doesn’t get their credit report damaged because they can go ahead for another mortgage just after two years.

 

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