Hanging Your Hat in 08077 - What is a Short Sale?

by Shawn Hughes-Camp, REALTOR, Long & Foster, Inc.

What is a Short Sale in Real Estate?

There are signs everywhere that the real estate industry is in recovery.  Compared to this time last year, there are less homes languishing on the market,  more buyers interested in making a  purchase, and homes are selling for amounts closer to the asking price than in several years past.  However, the "shadow" inventory is getting ready to emerge and there will be more short sale homes on the market than before!

"Shadow inventory" is the supply of homes that have not yet hit the market  for various reasons.  These homes might be distressed, getting ready to go into foreclosure, or need to be sold through a "short sale".   Owners of these homes have experienced some sort of hardship.  Most likely they have gone through their savings, sold any items of value (boats, second homes, even cars),  hoping by now they"d be back at full employment, returned to health or recovered from a financial problem they have been experiencing.

Short Sales vs. Foreclosure Process

When a homeowner can no longer make their mortgage payments they are generally faced with two alternatives:  short sale or foreclosure.  Here are the differences:

Foreclosure:  Everyone loses.

The process of foreclosure typically sells a home at a greatly discounted price and the lender's loss is great.  Often the properties going into foreclosure have been neglected, even abused and may require a lot of repairs on the part of the buyer. They are sold in "as is" condition, and home inspections usually require a potential buyer to arrange for utilities to be turned back on for the day of inspection. When the foreclosure process is completed, a seller must wait five to seven years to purchase their next home. It can also be difficult for the sellers  to find a suitable property to rent because their credit rating is very damaged.  The damage is also felt by the surrounding neighborhood, since multiple foreclosures depreciate towns.  Finally, there is a very  negative stigma attached to foreclosures despite how difficult economic times are and how many people are struggling.

Short Sale:  Economic Relief with Dignity.

Simply defined, a "short sale" occurs when a borrower's mortgage balance,  closing costs, commissions, and other fees total more than the market value of the home.  The owner can only sell the home for less than is owed on it.  

In a short sale, there are fewer costs to the lender, so the home typically sells just below fair market value.  A short sale is reflected as a "debt settled for less than full amount due" on the owner's credit report.   The damage to the owner's credit rating is less serious than the impact of foreclosure.  In fact, guidelines indicate that most owners who participate in a short sale with the lender will be qualified to purchase another home within two years' time.  Finding rental properties is also easier.

A popular myth is that most banks and lenders do not want to participate in a short sale.  That is not true. In many cases, a bank or lender will save 17 to 25% by accepting a short sale rather than foreclosing on a property.   In fact, there are more incentives for banks and lenders to advocate the short sale process than ever. Banks and lenders do not want to own property.  They want to loan money.  Short Sales are a true foreclosure prevention tool.

How does a Short Sale benefit the Homeowner?

• Relocation money:  Some lenders today pay $3000 to  $30,000 in relocation money.  This is something that must be requested, and with some lenders like FHA and VA, relocation money is mandated.
• The Seller Remains in Control:  While the lender needs to approve both the seller and the amount contracting the property for sale, the seller still owns the property , unlike in foreclosure.
• Lenders Use Short Sales as Foreclosure Prevention:  Consumer outcry and pressure from the government have forced banks and lenders to realize they cannot foreclose on people at a rapid pace.  New policies are assisting with more timely processing and approving more deficiency waivers.

Can anyone who doesn't want to pay their mortgage qualify for a short sale?

No.  However there are a variety of qualifying hardships that do qualify an owner to negotiate a short sale with a lender.

Some of those circumstances include:

• Unemployment
• Separation/Divorce
• Unexpected Medical Expenses
• Damage to the property due to flood, etc.
• Too much consumer debt
• Business failure
• Death of a spouse
• Military Service disrupting income
• Job relocation
• More…

If you are a homeowner finding yourself "underwater", seek an educated, certified real estate professional to discuss your "short sale" options.  He or she will be just one part of your team.  You will also be working with an attorney and a certified public accountant.

Consider a "short sale" as a way to rebuild your credit, leave your home with dignity, (knowing this can happen to anyone in this economy), and preparing to be a homeowner again within two years' time.

For more information, contact:  Shawn Hughes-Camp, (shawnhughes-camp@comcast.net)  609.634.6674