Short Sales

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Short Sales

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A real estate short sale is necessary when a person wants to sell their house but they owe more money on it than it is worth. The process gets its name because the sale proceeds are “short” of what is necessary to pay the lender in full. The lender is the company or individual (investor) that owns the debt. In order to have a successful short sale, the debt that is owed is negotiated with the lender to have the lender accept a short payoff.

To qualify for a short sale, it is normally required that the home owner is experiencing or has experienced some type of financial hardship. Some acceptable hardships include loss of a job (unemployment), under employment (when getting a new job), a death in the family, loss of tenants, illness, or divorce.

I always tell people that getting a short sale approved is the identical process as when they got their original mortgage, except you are trying to prove the opposite. Instead of proving you can afford the property you need to show why you cannot afford the property. That means supplying the last 2 years of taxes, bank statements, recent pay stubs, a detail list of expenses, and a hardship letter.

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When someone uses a mortgage to buy a home, they also sign a promissory note. A promissory note is a personal pledge that states if the property that is used as collateral for the loan has to be sold to pay off the loan, and at the time it is sold it is not worth enough to pay the loan in full, the signer of the note will pay the difference using other assets. Think of it as an I.O.U.

The difference between what is owed and what the lender receives is called the deficiency. The lender can ask for a deficiency judgment from the court, and if granted can hold the borrower responsible to pay that deficiency. That judgment would be filed against the individual, and would most likely need to be paid off before buying or selling any other property.

There are several reasons why the person owing the mortgage (borrower/seller) would choose to do a short sale.

  • Depending on how short it is, it may be easier and less expensive to accept a short payoff than for the lender to take the property back through foreclosure. The foreclosure process takes time and money.
  • If the borrower is still living in the property, they will typically continue to take care of it during the process, thereby keeping damage from occurring or, as an example, copper pipes from disappearing.
  • Finally, if the lender forecloses and takes ownership of the property, they are directly responsible for maintaining the property (shovel snow, cut grass) and paying property taxes. And they still have to sell the property to recoup as much of their investment as possible.

There are several reasons why the person owing the mortgage (borrower/seller) would choose to do a short sale.

  • Some lenders may give a small amount of money to the seller for relocation costs.
  • Cooperating in a short sale lets the seller have a little more control over the timing and process of their move out.
  • In a traditional sale, the seller is normally expected to make nominal repairs and to provide a continuing certificate of occupancy. In a short sale, the new buyer takes the property as is.
  • A short sale has less impact on credit than a bankruptcy or foreclosure.
  • Most importantly, if the short sale is negotiated properly, working with the lender will release the seller from the debt and the deficiency amount will be forgiven.

In my opinion choosing an option of a Short Sales is dependent upon individual circumstances. If you are the property owner and are in a situation where immediate relief is necessary then this is a good option for you to move forward to eliminate a potential liability hanging over your head. On the other hand, if you are the individual seeking to purchase a Short Sale you will need to have a firm grasp of all the moving parts in order to get the most bang for your buck.

I am here to help! My experience with the Short Sale process is extensive and coupled with my background in tax liens, land lording and flipping houses makes me a great partner for this type of investment.