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What is a Short
Sale?
Short Answer: Also known as a real estate short pay-off or a
pre-foreclosure workout, a short sale is an agreement with a lender
to accept less than the amount owed by a borrower via a sale of the
property to a third party. With this agreement, the lender releases
the borrower from the mortgage, thereby preventing foreclosure.
Long Answer: A short sale is a sale of real estate in
which the proceeds from the sale fall short of the balance owed on a
loan secured by the property sold.
In a short sale, the bank or mortgage lender agrees to discount a
loan balance because of an economic or financial hardship on the
part of the mortgagor. This negotiation is all done through
communication with a bank's loss mitigation workout department. The
home owner/debtor sells the mortgaged property for less than the
outstanding balance of the loan, and turns over the proceeds of the
sale to the lender. In such instances, the lender would have the
right to approve or disapprove of a proposed sale. Extenuating
circumstances influence whether or not banks will discount a loan
balance. These circumstances are usually related to the current real
estate market and the borrower's financial situation.
A short sale typically is executed to prevent a home foreclosure,
but the decision to proceed with a short sale is predicated on the
most economic way for the bank to recover the amount owed on the
property. Often a bank will allow a short sale if they believe that
it will result in a smaller financial loss than foreclosing as there
are carrying costs that are associated with a foreclosure. A bank
will typically determine the amount of equity (or lack thereof), by
determining the probable selling price from a Broker Price Opinion
BPO (also known as a Broker Opinion of Value (BOV) or through an
appraisal. For the home owner, advantages include avoidance of a
foreclosure on their credit history and partial control of the
monetary deficiency. A short sale is typically faster and less
expensive than a foreclosure. In short, a short sale is nothing more
than negotiating with lien holders a payoff for less than what they
are owed, or rather a sale of a debt, generally on a piece of real
estate, short of the full debt amount. It does not extinguish the
remaining balance unless settlement is clearly indicated on the
acceptance of offer.
Negotiations
Lenders have the department (typically called "loss mitigation")
that processes potential short sale transactions. Today, lenders may
accept short sale offers or requests for short sales even if a
Notice of Default has not been issued or recorded with the locality
where the property is located. Given the unprecedented and
overwhelming number of losses that mortgage lenders have suffered
from the 2009 foreclosure crises many are now more willing to accept
short sales more than ever before. This is great news for borrowers
who are "underwater" — in other words, those who owe more on their
mortgage than their property is worth and are having trouble selling
to avoid foreclosure as a result.
Lenders have a varying tolerance for short sales and mitigated
losses. The majority of lenders have a predetermined criteria for
such transactions. Other distressed lenders may allow any reasonable
offer subject to a loss mitigator's approval. Multiple levels of
approvals and conditions are very common with short sales. Junior
liens - such as second mortgages, HELOC lenders, and HOA (special
assessment liens) - may need to approve the short sale. Frequent
objectors to short sales include tax lien holders (income, estate or
corporate franchise tax - as opposed to real property taxes, which
have priority even when unrecorded) and mechanic's lien holders. It
is possible for junior lien holders to prevent the short sale. If
the lender required mortgage insurance on the loan, the insurer will
likely also be party to negotiations as they may be asked to pay out
a claim to offset the lender's loss in the short sale. The wide
array of parties, parameters and processes involved in a short sale
makes it a relatively complex and highly specialized type of real
estate transaction which is why unfortunately short sale deals have
a high failure rate and often do not close on time to save
homeowners from foreclosure when they are not handled by a
knowledgeable and experienced professional. The best sources of
knowledge and expertise in short sales are short sale negotiators,
loss mitigation specialists who are or work with real estate lawyers
who specialize in short sale.
One thing a buyer should know about a short sale is there is no
necessary commitment by the bank to sell the house.
Be sure to use Only An Accredited BBB Member to handle this type
of transaction. The high degree of integrity and professionalism
represented by this Accreditation is comforting in such a delicate
transaction.
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