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Short Sales – Getting in on the Action
A short sale is one in which the property has yet to be formally foreclosed, but the lender has agreed to take less than what is owed on the loan in order to recover the balance owed.
A short sale is typically allowed by lenders to prevent real estate foreclosure because they believe it will cause less financial loss than a foreclosure, plus it is generally faster and less expensive than a foreclosure. For the property owner, the benefits include avoiding foreclosures on their credit history
Think like this. A short sale is a negotiation with lien holders (usually on a piece of real estate) for less than the amount owed or less than the entire loan amount, and is usually executed to avoid real estate foreclosure.
Why do mortgages come to this stage?
Because the owners are in trouble. For one reason or another, owners go into default and lenders find that they can cut their losses on bad loans by selling the property before they go through the formal foreclosure process.
Why are there so many?
Due to the combination of falling real estate prices and properties financed with low down payments, many owners owe more on their properties than they are currently worth. Others who need to sell for other reasons (relocation, etc.) simply find themselves in the middle of a bad market.
Either way, when the property owner just can’t come up with the cash, the property owner’s pain becomes the lender’s problem, and the lender’s options are to either agree to a short sale and write off the unpaid loan or foreclose on the home and re-sell it. Remember, that choice is for the lender to make, not the seller. Lenders hoping to avoid more foreclosures on the books have embraced this option.
Selling your property
If you want to short sell your property, you may need to submit a wide range of documents to the lender.
- Call the lender You may need to make several calls before finding the person responsible for handling the short sale. Be sure to talk to someone who is capable of making decisions.
- Authorization letter This gives the lender written authorization to talk to certain interested parties, such as a real estate agent, closing agent, title company or attorney, about your loan.
- Primary net sheet This is an estimated closing statement that shows your expected sales price and all costs of sale, including unpaid loan balances, outstanding payments and late fees, real estate commissions, if any.
- A letter of hardship Describe how you got into financial straits and ask the creditor to accept less than full payment. Be honest. Lenders are not particularly sympathetic to situations involving dishonesty or criminal behavior.
- Proof of income and assets Lenders want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value and can’t repay a forgivable loan. Include copies of bank statements.
- Comparative Market Analysis This can be especially helpful if your real estate market drops and property values drop. Ask a real estate agent to prepare you a comparative market analysis (CMA).
If you decide to buy a short sale rental property, you will negotiate with the owner subject to lender approval. So remember, even though the owner might not be too concerned about the price you’re offering (the bank will get it all anyway), and may happily accept your offer, the bank might turn it down.
So here are some things you’ll want to include with a copy of your purchase agreement and goodwill deposit for the lender.
- A brief biography of you and your knowledge of real estate
- A complete financial package for you and two years of tax returns
- A pre-qualification letter from a reputable lender
- A strong statement of why the lender should accept your offer
It’s not a slam dunk
If all goes well, the lender will approve your short sale, and as part of the negotiation you may also ask that the borrower not report adverse credit to the credit reporting agencies (although the lender is under no obligation to accommodate this request).
But it’s not a slam-dunk.
A lot of things can come out of a short sale. For example, even if lenders lose a lot of money when they foreclose, private mortgage insurance payouts can mitigate those losses so that the lender can choose to foreclose. Additionally, second mortgage lenders such as equity lines of credit can also destroy the sale. Second-mortgage borrowers should be at the back of the line to collect loan repayments, but they can reject a proposed short sale if they don’t feel like it.
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