As a distressed homeowner, you may look to a short sale as a means to avoid foreclosure and further losses. As a buyer, you may evaluate short sales as opportunities to acquire affordable real estate. Third-party lenders, however, add an extra wrinkle to real estate short sale transactions, as they are motivated to maximize the selling price. Familiarize yourself with the terms and conditions of a short sale before exploring these deals as part of your own strategy.
Real estate short sales occur when a home is bought for less money than its total outstanding mortgage balance. The buyer, seller and lender must all agree to terms in a short sale. The bank is especially critical to this deal, because it must be willing to settle for less money than it is owed.
Borrowers often arrange for short sales during preforeclosure. In preforeclosure, a homeowner has defaulted on the mortgage loan but has yet to be evicted. Mortgage loans fall into default after 30 days of missed payments. Following 180 days of missed payments, Investopedia says that lenders file a notice of trustee’s sale within the local newspaper. The notice of trustee’s sale announces a foreclosure auction sale, after which a homeowner is evicted. A professional appraiser is hired to value the home prior to the short sale. The appraiser should confirm that the home is actually worth less than its mortgage balance. Property values usually decline amid recession, when unemployment is high and real estate demand is weak.
Compared to foreclosed properties, short-sale homes are in relatively good condition. In foreclosure, angry evictees may take out their frustrations on their former home and purposefully damage its walls, fixtures and appliances. After these people are evicted, the home could sit vacant for several months. At this time, neighborhood criminals may break into the property and strip it of valuable metal piping and electric wiring. During a short sale, however, the homeowner still resides at the property and is encouraged to make a good presentation to close the deal. Be advised that buyers may need to spend money on small repairs, because distressed homeowners often lack the financial resources to devote to general maintenance.
Short sales allow banks and homeowners to avoid the time and expense of foreclosure deals. In foreclosure, banks spend money on eviction and court costs. Further, banks may be forced to offer significant price reductions to attract buyers to a foreclosed property. With a short sale, homeowners can guard against doing further damage to their credit profiles. According to Experian, a foreclosure will remain on a person’s credit report for seven years.
For buyers, short sales are inconvenient transactions. Buyers must consult with a complex network of homeowners, attorneys, real estate agents and bank officials. According to Investopedia, it may take several months for the bank to respond to an offer, if it responds at all. Banks and sellers, however, face opportunity cost risks. Opportunity costs describe foregone profits that may have materialized, if the home were to begin appreciating in value.