In the real estate world, a short sale refers to the sale of a property at a price that is lower than the mortgage value. The process involves the homeowner convincing the mortgage bank to approve the sale so the homeowner can get out of the mortgage. Once the sale is made, the bank either forgives the deficiency (the remaining amount due on the mortgage) or asks the borrower to pay part or all of it. The sale proceeds always go to the bank.
The global financial crisis in 2008 left many property owners in a state of financial distress. Short sales became a trend in the wake of the crisis as many homeowners struggled with their mortgage payments.
The term has again surfaced due to the Covid-19 pandemic. While most real estate experts said the current market would definitely witness short sales, they also believe there won’t be as many transactions this time compared to the one seen in the last recession.
This is because, right before the pandemic peaked, homeowners were already presented with options to make repaying their loans easier. One of these options came in the form of loan relief measures introduced by both the government and the mortgage lenders.
Mortgage forbearance has proved to be a huge help for many American homeowners who have either lost their jobs or businesses during the pandemic, or for those who are earning less than they did before the crisis started. However, the borrower-assistance programs are scheduled to end in the coming months, posing a serious challenge to borrowers who continue to face partial income loss or remain jobless.
Upsides and downsides of a short sale for sellers
Homeowners who find themselves no longer capable of paying their mortgage can take charge of their situation by opting for a short sale. Most property owners prefer this strategy because it does less harm to their credit score than a foreclosure. It also removes the stigma attached to a foreclosure.
While a short sale provides several benefits to the seller, it does have its drawbacks as well.
Loan forgiveness: The key benefit of a short sale is the potential of being granted a partial or full forgiveness on the deficiency. To be able to avail of this, the borrower (seller) needs to meet certain requirements from the lender in terms of paperwork.
Eligibility of buying another home: Homeowners who choose the short sale route don’t have to wait for years to secure a new mortgage in order to buy another house. Of course, this depends on the seller’s credit report. If the report does not show a history of late payments, then the homeowner can start hunting for their next house right away.
Savings on fees and charges: Selling a mortgaged property usually involves paying closing costs that include real estate agent commissions, tax charges and mortgage payoff fees. Some lenders may charge prepayment penalties and an additional fee for the early release of the mortgage lien. In a short sale, the lender bears the fees and charges, and may pass on some to the buyer.
Less emotional turmoil: Losing a home is one of the most devastating events that could happen to anyone. Once the bank decides on a foreclosure, the stress quickly escalates. Soon the property owner starts receiving demand letters and phone calls from the lender’s legal team. This eventually leads to eviction, causing intense emotional turmoil to the homeowner. However, a short sale allows the seller to take control of the situation by negotiating only with the bank, the buyer and the real estate agent. The process is similar to a normal retail sale. And, the homeowner gets to keep some of their dignity intact.
Damage to one’s credit score: Although most people believe that a short sale presents less damage to one’s credit score than a foreclosure, that’s not entirely true. Getting a new mortgage may become more challenging, as some lenders do not see any difference between the two. A short sale and a foreclosure are reflected in the credit report for years, although a short sale’s damage is not long-term.
No profit: The seller does not receive any proceeds from the sale. These automatically go to the bank. Since this is the case, they need to start saving again for a new home.
Loan forgiveness may get denied: The lender may reject the borrower’s application for loan forgiveness based on several factors. Thus, the seller is still required to pay the deficiency.
Lender approval is a tedious process: Property owners cannot just short-sell a property without obtaining lender approval. This is essential because the lender will receive less than the amount owed on the property. Before being approved, the seller needs to gather a number of documents that demonstrate his or her financial hardship. These include a hardship letter, wage documentation, tax returns and bank statements, among others. The short sale process consumes more time than a traditional sale, as it may take weeks, several months or even a year. And even if the seller has all the valid reasons not to continue with paying the mortgage, a short sale may not happen. The lender may decide that a foreclosure is a better option.
Upsides and downsides of a short sale for buyers
Meanwhile, a short sale property provides buyers with a chance to acquire a home without it leaving a hole in their wallet.
And just because a property appears on the short sale listings doesn’t mean the buyer no longer finds it necessary to conduct proper due diligence. It always helps for buyers to employ a professional agent with a wealth of short sale experience. After all, no one wants unpleasant surprises, especially after they have signed on the dotted line.
Before considering a short sale home, buyers should keep in mind that it also has its pros and cons.
Better position to negotiate a price: Since a short sale benefits both the seller (who wants to avert a foreclosure) and the lender (which wants to recoup its losses), the two will be pushed to work together to cut a deal. The buyer can take this opportunity to negotiate the price, as a reduced price offer has a lower chance of being rejected in a short sale than in a normal property sale.
Minimal competition: Most homebuyers don’t have the fortitude to see through a short sale, which could take several months to close. This gives those who want to pursue a short sale purchase a higher chance of owning the home.
Better financing terms: While the lender can decide to foreclose a property rather than give it up for a short sale, it knows that a short sale is the lesser evil between the two. Foreclosures are expensive and there is no guarantee that the property will be sold right away, which means non-stop expenses until a buyer is found. To prevent further expenses, banks usually offer short sale property buyers better financing terms, such as a low interest rate, to get the property sold.
Sense of cooperation between owner and buyer: Buying a short sale home means zero drama from emotional homeowners. Foreclosed property owners sometimes present problems to a buyer like intentionally destroying parts of the property. In contrast, short sale property sellers are motivated to make a sale, sparing the buyer the headaches related to a foreclosure.
‘As is’ property: Unlike a repossessed property that has been fixed by the bank before it is put up for sale, a short sale property is being sold on an ‘as is’ basis. Therefore, it may have electrical, plumbing and heating issues, and some of its structural parts may need repair. Buyers are advised to hire a home inspection professional to check on the property.
Longer process: Compared to a traditional property sale, the short sale process takes months or a whole year to complete, a negative for those who want a quick home purchase. In short, the sale is at the mercy of the lender. The bank may choose to deny or not respond to a seller’s request for a short sale even if an offer is already available.
Losing out to an all-cash buyer: Homebuyers in the pursuit of a short sale run the risk of being disadvantaged by an all-cash buyer or a buyer who provides a bigger offer. Naturally, lenders favor these sorts of buyers over those who are seeking a huge mortgage to fund the purchase.
Possibility of paying closing fees: To recoup more money on the mortgage, the lender may interfere with the negotiations by asking for concessions, including letting the buyer pay a portion or all of the closing fees.
Hire knowledgeable agents
Whether one is facing a short sale or planning to buy a property on a short sale, it is wise to work with knowledgeable agents for a hassle-free transaction.
These experts provide guidance on the complexities associated with a short sale, including handling the paperwork and negotiating with the lender.
Call RI Home Store today to experience an easier selling and buying process