Short Sale Sellers
For many homeowners, especially those who may have reached a little beyond their means getting into a new home, the past 18 months have been difficult, to say the least. Pair this scenario with the rising unemployment rate, and interest rates on adjustable rate mortgages (ARMs), and many homeowners are beginning to sink.
In the past, the answer was simple, if a homeowner defaulted on mortgage payments, the home would go into foreclosure. The bank would own the property and the homeowner’s credit will be impacted for the next 10 years. With a record-setting number of homeowners behind on their payments, many banks and homeowners are looking into a different solution: a short sale. A typical short sale works something like this:
1. The homeowner’s bank agrees to a short sale.
2. The homeowner hires an agent to find a buyer for the house.
3. The home is sold for a loss.
4. The bank agrees to eat the loss.
5. The bank doesn’t become the property owner.
6. The homeowner’s credit is only marginally affected.
The short sale scenario sounds a little too good to be true, right? As with every situation, there are certain things that should be taken into consideration. First, the bank may “eat” the loss from what’s owed on the home, or they could still demand the homeowner make some kind of payment or share the loss. If a bank is kind enough to absorb the loss, the IRS might treat that as taxable income, and the homeowner will have to come up with the cash to cover the taxes. Second, banks are more willing to absorb the cost if the homeowner finds a real estate agent willing to work for a reduced commission. Finally, if the bank knows that the homeowner was financially responsible before and during the defaulted mortgage, they are more willing to work with you. Now is not the time to buy a new car or expensive toys. There is typically a fair amount of paperwork involved in applying for a short sale; homeowners should know that most banks require a hardship letter, financial analysis worksheet, recent pay stubs, recent bank statements, and income tax returns.
Rather than lose a home, homeowners should consider speaking with their bank about re-structuring their loan, or possibly missing a couple of payments in order to get back on their feet. Most banks are willing to at least entertain the idea of a short sale, because after all, they are not interested in holding deflated properties in a down economy.
Short Sale Buyers
Buying a short sale can be a hassle with additional paperwork and playing the waiting game with the bank, but the payoff is purchasing a home for under market value. Here are a few steps for purchasing a short sale.
• How to find short sales. Online databases, courthouse listings, legal ads and an experienced real estate agent are great resources. Try to determine how much is owed on the house in relation to its approximate value. If it seems high, it’s a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan. Pass on those in which the owner has a lot of equity in the home—the lender likely will prefer to foreclose and resell closer to the market price.
• Do your homework. Tour the property; have an inspection performed so there are no surprises on move-in day. Find out if there are any liens on the property, and which lender is the primary lien holder. If you are using a real estate agent, they can get this information for you.
• How will you pay? If the potential buyer is a good credit risk, the existing lender may be willing to give him/her a loan. Since they already have a lot of your information in the short-sale paperwork, they may be able to expedite the loan application process. Once an agreement is in place, the bank will want to close fast, sometimes in as little as 20 days, buyers shouldn’t wait until the last minute to have financing.
• Sign on the line. Most lenders have an application specifically for a short sale request which will need to be completed prior to negotiations.
If you’re using a real estate agent, many of these steps will be taken care of by them. Most agents are aware of the short sale process, and can be a true asset from finding a home to contacting the bank for potential buyers, and the best part is that their fee is included in the sale price, with no out of pocket expense for the potential buyer.
Josh Anderson is a Realtor with Keller Williams Realty in Nashville TN. If you have any questions about the real estate market, please call (615) 509-7000, email Josh@JoshAndersonRealEstate.com, or visit www.JoshAndersonRealEstate.com.