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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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The Short Sale Definition

February 26, 2012

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The term short sale has become common. People are wondering whether to go for a short sale or for a foreclosure. It may be difficult to decide on what to do. However, once you understand the short sale definition then you are at a better position to decide on the course to take. Many complaints have been registered that the blogs and articles posted on the real estate agents’ websites are more technical because the agents present the short sale information exclusively professionally. It is therefore better that we understand it in relatively more simple terms.

This is the short sale definition at a glance: the lender of some property accepts the sale of the property for a total sum relatively lower than the face value or total value of the mortgage loan. Very simple! However, we now have to understand the short sale definition a little more deeply.

There are three important parties in a short sale—the lender, the seller and the buyer. A short sale does not become good news to the seller of the house on a wider scale. It therefore comes to play in times of financial difficulties when you discover that the total amount you have is less than the total mortgage, hence it is impossible for you to repay your mortgage in full.

Let us look at it practically now. You may have a mortgage that is worth $800,000. It then happens that you are facing financial difficulties such that you are unable to repay the mortgage. You can consider a short sale then. First, you must find a buyer who is willing to pay for the house. You can then approach your lender and tell him of your intentions to short sell the house. The lender will then decide if to carry on after searching all the short sell information from brokers and agents. The lender will then assess the value of the house and compare it with the market value of similar properties. If the lender finds it acceptable then he can accept the house to be short sold at a price of say, $650, 000. In this case, you save $150,000 on the mortgage.

The need for short selling may also arise when you have a mortgage of say, $500,000. However, you discover that the real market value of the house at the moment is $400,000. You may then consider a short sell so that you don’t end up paying a total of $500,000 because you can prove the financial difficulties so that your lender can accept a sum of about $400,000. This will enable you save $100,000 on the mortgage amount.

Short selling is very critical. The lender simply forgives the amount by accepting to take an amount relatively lower than the market value of the loan thus giving you a saving. There are many benefits that accrue to the parties in a short sale as well: the buyer obtains the house cheaply, the seller retains a good credit score while the lender sells the house at a reasonable market price without having to undergo the stress of waiting for several months to sell the house.

 

 

 

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Advantages and Disadvantages of Short Sales

February 14, 2012

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In a layman’s language, we can describe a short sale as the situation where a home is sold to a new buyer a relatively lower price than the current or face value of the mortgage. This price is still lower than the face value even in addition to other costs such as the real estate agent’s commission, other sales and closing cost items such as the Escrow, title and any other related cost.

There are three parties involved in short sales. They include the seller of the house, the buyer of the house and the bank that had provided the mortgage loan for construction or acquisition of the house. Like any other financial transaction, short sales have advantages and disadvantages. However, the advantages outweigh the disadvantages in gigantic proportions.

The Advantages of Short Sales

  • The buyer of the home obtains a good house at a lower cost than the face value of the house in the market. It would be more expensive if the buyer were to go for a new house without involving short sales.
  • The homeowner enjoys a lot of responsibility and dignity during the short sales because the house is sold legally and they move out in a dignified way, unlike in the case of a property auction where the homeowner is evicted like a wild dog.
  • The bank involved stands to benefit from the short sales in comparison to a foreclosure because they involve the services of a qualified property investor thus saving the bank the time involved in closing the sales and an assurance of the best market price for the house despite the fluctuating prices.
  • The seller of the home also enjoys a good credit rating when compared to a foreclosure because he/she can qualify for another mortgage loan just after two years as compared to a foreclosure where the seller has to wait for seven years in order to qualify for a mortgage. It also improves the credit history when compared to someone who has never had a mortgage before.
  • In case there was a foreclosure notice that was reported, the homeowner has the option of delaying any action that may be brought against them in favor of the short sale. However, approval may take a period of up to three months in most cases.

The Disadvantages of Short Sales

As noted earlier on, the disadvantages of short sales are far much fewer compared to the advantages. We could have ignored them because they have very little weight when you calculate your steps carefully. However, don’t worry because we’ll look at them anyway:

  • It can be difficult to negotiate a short sale because of the number of parties involved from the side of the buyer when compared to the conventional method of selling the house. The parties at a glance are the seller, the seller’s agent, the first lender, the prospective buyer and his agent and loss mitigator of the first lender.
  • There are many hurdles you may meet in a number of States in order to qualify for a tax exemption while carrying out the transaction.
  • Generally, not each seller of the home qualifies for the short sales.
  • At times, some lenders may refuse to accept short sales in favor of foreclosures.

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What Is A Short Sale Property

October 20, 2011

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short saleA short sale property is a home that being sold for less than the current amount owed to the mortgage company or lender. A home is normally sold in a short sale if the owner is no longer able to pay their loan which can be caused by various reasons. These can include, death, health concerns, divorce, job loss, etc. These reasons are always extreme life changing reasons that can vary between lenders. The lender must always approve the short sale, the owner can never choose to sell in a short sale without the approval of their lender because they always have final say.

A short sale is also an alternative to foreclosure and carries fewer negative consequences. Lenders would prefer to sell a home in a short sale rather than foreclose in the current housing market. Banks are sitting on many properties they are having difficulty selling and taking a small loss for immediate gain is an attractive offer. It’s also better for the seller but they would need to be proactive about the process because it can be time consuming. Getting started as early as possible is the best decision a seller can make if they are considering a short sale.

You can find more about short sale vs foreclosure on this page.

Buying a short sale will be similar to purchasing a property in the traditional manner but with slightly different terms. The person selling the property will always need to get final approval from their lender so this can slow down the process considerably. The process can be very long at times with many setbacks but if you have the patience to work through the complications you could walk away with a nice property with a hefty discount.

Another way that short sales differ from the traditional is that these properties are sold ‘as-is’ meaning that any repairs or concerns about the property that emerge will generally not be given attention. Major concerns will normally be addressed but the smaller items that would normally be taken care of will be left up to the buyer to handle. This is one of the costs of buying a short sale property. This is not always such a bad thing considering someone selling via a short sale will still be living in the property ans thus maintaining things as opposed to a foreclosure where the owners may trash the place before being evicted.

Overall short sale properties can be very enticing due to the discount but you need to be extra cautious and be prepared to wait a long time for the process to complete. Banks can be fickle with the price and some sellers might try to entice potential buyers with a lower price point before getting approval on that price from their lender. This can cause a huge delay if the bank never approves a price. Always have a complete inspection done and hire an agent who specializes in short sales which can help avoid any of the pitfalls that normally come up.

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Short Sale Definition

August 9, 2011

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So you’ve heard the term ‘short sale’ but you aren’t exatcly sure what a short sale consists of. Well we are happy to explain the short sale definition for you today. Short sale is a rel estate term for when the homeowners sells their home for a loss. This requires negotiating with your lender because they ultimately are the nes who have to sign off on the deal. You cannot sell in a short sale without your lenders permission.

The way the housing market is these days many people are opting to sell their homes in a short sale. The banks/lenders are allowing the homeowners to sell instead of taking on even more foreclosed properties. Normally your lender will only allow you to sell in a short sale if you are behind in your payments and facing foreclosure. You would also be required to write up a hardship letter explaining why you should be allowed to sell your home for a loss. We have a nice write up on writing a hardship letter here on our site if you need some help writing one.

While most who opt to sell in a short sale are already facing foreclosure this doesnt always have to be the case. This can also be used before you get into trouble if you are being proactive about yopur housing situation. This doesnt mean that you can just sell for a loss anytime you want, you would need to be on the path to trouble. You are just being more proactive than others who wait until they are facing foreclosure. An example would be if you lost your job with little prospects for a new one in the near future.

Right now is a great time to sell in a short sale since the government is forgiving all taxes owed on the amount of debt forgive. In brighter times you would be required to pay tax on any amount of debt your lender forgives. It’s always best to work with a short sales expert who knows how everything works. You don’t want to end up paying any money to your lender or paying more taxes than you should. It’s a bit more complicated than a normal real estate transaction.

We hope our short sale definition helps answer your questions. If you would like another take on the subject please visit wikipedia to read what they have to say.

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Is A Short Sale Still a Good Idea?

April 7, 2011

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I get asked all the time about the short sale process. Is it a good idea? How bad does it damage your credit? Why does it take so long? While the process can be extremely length at times, overall it is still a good idea for those in a specific situation. We all know that market values on the majority of homes has dropped and in some cases quite significantly. If you are willing to take a loss on your home and want out of your current situation then a short sale is a great idea.

It will have an impact on your credit report but letting your lender foreclose on you would be worse. If you are in the position where you would request a short sale from your lender you might not need to be worrying too much about your credit. Chances are it is already somewhat damaged from late payments from your financial burdens. One of the requirements lenders look at is financial stress when considering your request for a short sale.

The length of the process can be cumbersome for most people. The name of the process is a bit of an oxymoron as there is nothing short about the process.  The good news is that congress is attempting to push through some legislation that would speed up the process. The length can be due to a backlog on your lenders end and then they may want to evaluate your request in several areas. Are you financially stressed to the point where they feel it would be worth taking a loss? Do you have a job? Gone through a divorce? Those things would help you in your request. Remember though, your lender does not have to honor your request but most will right now due to not wanting to take on another home.

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Information About Short Sales

April 5, 2011

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If you are unsure about what a short sale is I will help you understand. In a short sale you are selling your house for less than its current market value. You will not make any money from selling your home.

In this process your lender will forgive a portion of your debt. You may have to pay taxes on this forgiven debt so please keep that in mind. In order to sell your home in a short sale your lender will have to agree to allow you sell. Your lender does not have to agree but they are more likely to honor your request if you meet certain criteria.

Have you lost your job and are unable to find new work? Have you gotten a divorce? Has there been a major death in the family? Is your home worth significantly less than what you paid? Your lender will require proof from you if you make any of these claims. It is your responsibility to do all of the footwork and present a compelling case to your lender in order for them to approve.

The good news is that in the current housing market most lenders are willing to work with you on a short sale instead of going into foreclosure. A short sale is only slightly better than a foreclosure on your credit report and lenders will be able to tell you sold your home in a short sale. Also, remember that there is nothing short about a short sale. The process can take a long time to complete bringing stress and frustration to your already troubled housing problems.

It’s a good idea to hire a realtor who works with short sales on a regular basis to help guide you as smooth as possible through the entire process. This can make a huge difference in the amount of time it can take to complete. The lender may require you to spend less on your realtor since you are asking them to take a loss on the house.

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