What is a Short Sale and How is it Used to Avoid Mortgage Foreclosure?
Posted by: real estate / Category: ForeclosuresA short sale is a when a lender agrees to a discount on what is owed him to allow the sale of a property prior to a foreclosure auction. When the mortgage holders accept a lesser amount of money on what they are owed, they agree to release their interest and ownership in the property. Short Sales are a good form of house foreclosure prevention.
It widely known these days that a short sale is used to stop foreclosure; it is the major reason a bank would even entertain accepting less than they are owed. However, if the lender stands to recover all of their money owed by allowing the house to go to auction, then they will not accept a short sale. A lender must feel like discounting the loan is in their best interest for a short sale to succeed. Here is a short example of how it works;
- Jack and Jill own a house worth $150,000 and they owe $145,000.
- Jack and Jill are getting divorced and can’t make the mortgage payments any longer.
- The bank sends them a notice that if they don’t catch up the payments, then they will foreclose on the house and send the property to auction.
- Jack tells Jill that he don’t give a crap about the house anymore and is moving on. Jill doesn’t have any money to catch up the payments because it all went to the divorce attorney.
- Jill receives a letter from a local investor saying that he noticed she was in foreclosure and wants to help.
- Jill calls the investor and finds out that a short sale is her best option since there is not very much equity in the house to pay a realtor and there are tons of houses on the market with very few qualified buyers. The chance of the house completely foreclosing before it sells is likely.
- She fills out some paperwork with the investor and then the investor calls the bank.
- The investor offers to buy the house directly from the lender for less than what Jack & Jill owe on the house. The negotiations between the investor and the bank go on for a while until the lender decided that based on the prevailing circumstances surrounding the property, they will accept the investors offer.
- Finalizing paperwork is filled out at a local title company; the investor buys the house for $100,000. Jack and Jill get out from underneath a foreclosure.
Short Sales are not guaranteed to succeed and the bank doesn’t have to discount. They always have free choice to send the property to auction and complete the foreclosure. A foreclosure costs a lot of money for the lender, if they can salvage their loss through a short sale, then they will do it. The chances of a short sale success are increased if;
- The property is damaged and needs lots of repairs.
- The homeowner owes the same amount or more on the property than it is worth.
- If there are lots of houses on the market with few qualified buyers.
- If the homeowner has already tried to sell the house for the owed amount and failed.
- If the cost for the lender to foreclosure plus the value of the house add up to be more than the house is worth.
- If there are junior liens on the house that are also accepting less money than they are owed.
- When there are lots of other foreclosures in the area, hence reducing the success of the sale of the property at an auction.
- If you have a smart negotiator like a good investor to bring all of the above factors to the lenders attention during the negotiating process.
Short Sales are complicated and should be handled by a talented negotiator. Just like not all people are great salesman, not all people are great negotiators. Finding a good one will make a drastic difference. Realtors have been known to perform an occasional short sale; however, there skill in this department should be checked. Most realtors are not educated to be good negotiators which could cause the short sale to fail.
On the flip side, an investor who is a good negotiator could be a slick tongued scam artist as well. So proceed with caution and don’t be afraid to ask lots of questions. With the economy the way it is, there are scam artists on the prowl, but it doesn’t mean that all investors are bad.
Another thing to remember is that the homeowner doesn’t profit from the sale of the property during a short sale. The real benefit for the homeowner is stopping the foreclosure in a hope to salvage their credit.
I don’t believe that a homeowner should have to pay for a short sale as their success is not guaranteed. A fair investor will not charge the homeowner.
For more information on how to avoid foreclosure, read this ebook called What To Do When Facing Foreclosure located at http://www.foreclosureroadway.com
D_Rossi
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- Property Repossession - How to Keep Your Assets and Property Safe - June 30th, 2009
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Tags: Foreclosure, Lease, mortgage, mortgage foreclosure