A Short Sale is the best way to sell a property that is more
than 20-30% under water, without having to pay off the shortage, is to
negotiate a short sale. This is also one of the most common ways to sell a
property in which the owner is already many months behind in payments, has
little or no equity, and wishes to avoid a foreclosure.
A Short Sale involves an investor or buyer and a Realtor,
working with the property owner to negotiate with the property owner's lender.
The goal of the negotiations is to postpone (and prevent) a foreclosure auction
and negotiate a discounted payoff on the loan (or loans). Using this method,
the property can be purchased at a reduced price (less than what’s owed) and a
foreclosure can be avoided.
Short Sale Example
Let's look at a Standard Sales Scenario...
- Current Property Value: $185,000
- Existing loan(s) payoff: $210,000
- Sales price needed to break even: $231,000 (assumes ~10%
closing costs and commissions, etc.)
This property would have to be sold for approximately $231,000
to cover all loans, taxes, closing costs, commissions, etc. Unfortunately, the
property is only worth $185,000 in the current market, so the property owner
would have to come up with $46,000 to cover the difference.
Now, let's look at a Short Sale Scenario...
- Property Value: $185,000
- Negotiated loan(s) payoff: $165,000
- Sales price needed to break even: $181,500
In this scenario, after the loan is negotiated, the property can
be sold for anywhere from $181,500 to $185,000 with no foreclosure and no
additional cost to the property owner.
Short Sale Advantages and Disadvantages
The advantage to a short sale is that it may be the only way to
actually sell a property where the loan(s) add up to more than the property is
worth, and the property owner cannot make up the difference. And, starting a
short sale can both postpone a foreclosure and (if successful) avoid a
The disadvantage to a short sale is that, like everything, it
does affect a property owner's credit. A successful short sale is simply better
than a bankruptcy and much, much better than a foreclosure (the "Atomic
Bomb" of credit scars). Also, about half of short sales are either denied
by the lenders, or are never negotiated to a price that a buyer will accept,
meaning that about half still end in foreclosure. Finally, a short sale may
result in a deficiency judgment (in the event that the lender sues you for
their loss, which is rare), a negative impact on a person’s security clearance
(for some government employees), and a 1099 for phantom income that may have
tax ramifications (although the Debt Forgiveness act of 2007 temporarily
restricts lenders for issuing these to homestead short sale sellers)
Short sales are highly complex negotiations that take
significant time, paperwork, and expertise. They are among the most complex
transactions in real estate. In addition, it typically takes many months to
negotiate with the seller's lender.
Common Questions about Short Sales
Question: Can I
do a short sale myself? Answer: No. A
lender will need a purchase offer before they will even consider negotiating a
short sale. The offer must be real and be accompanied by a "Proof of
Funds" letter from the investor and/or buyer. Additionally, the lender
will want a great deal of documentation from the property owner. Our network of
investors and Realtors has a great deal of experience and expertise in this
Question: Will a
short sale hurt my credit? Answer: Yes.
Everything you do affects your credit to different degrees. In order for a
lender to consider approving a short sale on a loan, the loan will generally
have to be non-performing. In other words, the property owner must be behind in
payments – thus credit damage is already occurring. Once the short sale is
approved, the lender will "charge off" a portion of the loan, which
also affects the property owner's credit. The benefit is that the property can
be sold and that a foreclosure and its legal ramifications can be avoided. Most
experts acknowledge that a foreclosure is the worst thing that can happen to
your credit. Question: Do I
have to Bring Money to the Closing with a short sale? Answer: Not
usually. The bank will pay for all of the closings costs, commission, taxes and
fees on behalf of the property owner (out of the proceeds) to facilitate the
transaction. Beware of companies that charge fees for foreclosure avoidance,
loan modifications, and credit repair - many of these services are not
reputable, and possibly not legal.I am part of a
network that has performed over 1,000 short sales for sellers needing this
If you would like to discuss a short sale, and all of your other
options for avoiding foreclosure, give Ron Cooks a call!
Author:Ron Cooks Phone: 254-702-0064 Dated: September 26th 2014 Views: 540 About Ron: I’m a retired Army Warrant Officer that served our nation for 25 years. I was born and reared in ...
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