I am sure that most of you have heard the term short sale by now. It appears to be synonymous with real estate as more home buyers discover the pros and cons of this type of transaction.
A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from a seller, you are purchasing the property directly from the lender for a discount. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $350,000. The homeowner obtains permission from the Lender holding the mortgage to list the property at its present market value which is less than the $350,000. A buyer submits an offer to the Listing Realtor for $270,000 and it is submitted to Lender. The lender accepts the $270,000 as full payment for the loan. You may wonder why the Lender is willing to take such a discount. There are several reasons why this makes sense to the lender. First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished.
Unfortunately for many homeowners, foreclosures are at an all time high, which basically translates into more opportunities for you. Since foreclosures are increasing, this is the perfect time to pursue a short sale because there will be more and more lenders discounting properties. It is safe to say that most lenders will accept a short sale; however, you may come across one or two lenders who will not discount. If the numbers work out for the lender they will do it.
Short sales are done when the property is in the pre-foreclosure state. After the bank has foreclosed on a property it is no longer a short sale. The bank will manage the property through their Real Estate Owned (REO) department and place it on the market. There are two stages within pre-foreclosure. The first stage being those individuals who are behind on payments and the second stage are those who are behind on payments with a notice of default. In order for this to work properly and for you to successfully get a short sale, you must find the homeowners who are in the second stage of pre-foreclosure or more than 3 payments behind on their mortgage. Once the notice of default has been recorded, banks become motivated as well, so you are more likely to get a discount. Until that time, very rarely will a bank ever discount a mortgage that soon.
It does not matter what type of house or condition it’s in, all mortgages can be discounted. The best properties to perform a short sale on are located in an area of high foreclosure rates. Properties that need a lot of work are also a good candidate for short sales. Some Properties have more than one mortgage; therefore approval is required from all Lenders. It is important to work with an experienced Realtor to assure that all Lien holders are willing to accept a short sale. Contrary to traditional sales, short sales take much longer but are usually worth the wait for the homebuyer.
Adriana Cordero, Your Realtor