Thursday, March 20, 2008

Short Sales - Good for you or the bank?

"Short Sales" seems to be the latest buzz word in the Foreclosure World.

People are always looking for Short Sales as if they are some kind of automatic deal; As if a short sale is a quick fix to foreclosure real estate wealth. The fact is, short sales are very complicated, they aren't always deals, and they very often don't even happen.

What is a Short Sale?

A Short Sale is a real estate transaction where the lender accepts less than full payment when the property is sold. The lender gets "shorted" on the total amount due. It's definitely not a good deal for lenders as they lose money on short sale transactions. The new buyer of the property may be getting a deal because they are most likely getting the house for less than the previous buyer payed for it. In declining markets like Arizona, Florida and California, Short Sales are often necessary just to sell a property at market value. These short sale purchases aren't really deals at all.

How do you buy Short Sales?

Many short sales are listed. The borrowers in default realize that they need to sell their house to prevent foreclosure and further damage to their credit. These properties can be found on MLS Sites. For more ambitious buyers looking for short sales, these properties can be purchased by contacting the distressed borrower directly. Most people in default who know they owe more than the house is work don't think they have an option. They believe that the only thing they can do is let the property foreclose. Distressed properties that aren't listed can be found on sites like the Bargain Network Homes.

Once short sales are found, the price has to be negotiated by both the owner and the lien holders. Written real estate purchase contracts must still be signed by the seller and submitted to the lender. These offers now have to be approved by the bank. In order for banks to accept short sale requests, they want evidence that the borrower has a legitimate hardship that prevents them from making payments. They will ask for a financial hardship letter, bank statements, tax returns, etc. They need to qualify people for Short Sales. Many banks won't accept short sales unless the borrower has already missed several payments and has received a "notice of default." Most ordinary borrowers that are over their heads don't match this criteria. Many borrowers have multiple loans tied to the property. For a primary lien holder to negotiate a short sale, the junior liens must first agree to "short" their loans. If these negotiations can't be made, the deal falls through.

Why do banks allow short sales?

Banks allow short sales because losing some money, but collecting the bulk of the loan balance is less damaging that allowing the property to go do the foreclosure auction. In this regard, purchasing a house in short sale status is an advantage for the bank.

Buying homes in short sale status can be very beneficial, but it also can be very challenging. It is not something to attempt unless you are serious about real estate investing, and is not something you want to do without the help of real estate professionals.

1 comment:

Carrie Newhouse said...

I agree.. short sales are often the best solution for the homeowner and the bank.