By Karen D. Friedman | 01.10.20 8:00 AM
What is a short sale? In simple terms, a short sale is when the borrower or homeowner sells a property for less than what they owe on it. They’re “short” on the amount to be repaid to the bank. You may have heard the term but passed over it because you didn’t know much about it.
There’s plenty to learn about a short sale because of it’s legal and economic influence on the real estate industry. So, let’s first discuss the factors that may lead to a short sale.
The Economy and a Short Sale
When we fall into a recession, it causes an overall slowdown in economic growth and job growth. Many people can lose their jobs and find it difficult to make their mortgage payments. Even a two-income household may struggle to make payments if one person is no longer employed. This would now become a financial hardship.
We saw evidence of these factors in 2006 when the residential housing boom came to an end, and the subprime mortgage crisis was in effect. Many found themselves victims of predatory lending and in need to sell their homes for less than what they were worth.
Devalued Property and the Short Sale
People who can’t keep up with their mortgage payments may decide to sell their home. The problem is, their home may not have appreciated and is now worth less than what they owe the bank.
So, if the homeowner paid–let’s say–$1,000,000 and their home is now worth $600,000, that’s not enough to settle the remaining $400,000 they would owe the bank. This is the issue that homeowners run into when short sales become the only viable option.
The homeowner no longer has to pay the remaining $400,000 on their loan. But, the collateral was their home. This is an unfortunate way to forgive the loan debt and could be the only effective way to settle the debt.
But, what would happen if the homeowners didn’t settle for less and instead chose foreclosure? That becomes a different story with different consequences.
Choose Short Sale over Foreclosure
People have the option of letting the home go into foreclosure, but why let it get that far? The foreclosure process has extreme ramifications on your credit, it could have tax implications, and foreclosure may make finding a new home harder since most banks will consider you a higher lending risk.
If at all possible, it’s best to avoid foreclosure because of the long term negative effects it has on your personal record.
The Short Sale Process and Benefits
Let’s play out the scenario with all the factors in place. So, let’s say the economy changes, you unfortunately lose your job, and now you can’t make your payments. Your property is worth less than what you owe and the bank has agreed to a short sale. Remember, that’s the key. The bank has to approve a short sale.
The short sale process isn’t simple but it’s very beneficial to the borrower. If the bank approves a short sale, they forgive the difference owed to them on the property. In some instances, the amount can be upwards of a million dollars. So you get to sell the house for what it’s worth and the difference of what you owe is gone.
It’s important to know ahead of time that the short sale process can take months or maybe years from start to finish, so have patience. This will not be the usual timeline of a traditional listing where it takes about 30 to 45 days to sell.
The Short Sale Timeline
You move forward in the process. Now, what happens? The bank will require you to fill out and submit a number of documents and may request other information as well. It may be challenging on all sides but the real estate agent is there to facilitate all this between the client and the bank.
Now you have to find a buyer that is willing to purchase a short sale home. Most buyers are not prepared for the additional paperwork, meeting the qualifications, or waiting the additional time to acquire a short sale home. Most find the process too challenging or frustrating and won’t even consider it.
The time frames for a short sale will differ from a traditional sale. Once you have an accepted offer, it will go to the lender/seller to accept and approve. The average timeline is about 60 to 90 days. That means 30 days to sell + 60 days for approval + 30 days to close escrow = 4 months, on average.
Final Thoughts on a Short Sale
In a perfect world, the economy is stable, properties will always appreciate, and, when it’s time to sell, you get over asking price. But, we all know that’s not reality and complications in life will arise. In the real world, things happen, people lose their jobs, and sometimes you just need a second chance.
Thankfully, in the real estate world, the short sale is the second chance. You may lose your home but you don’t end up in debt.