As the number of distressed properties increases, more sellers are turning to short sales as a way to avoid foreclosure. What exactly is a short sale? According to the National Association of Realtors (NAR), a short sale is “a situation in which the seller (1) owes more money on the loan than the sale of the property will likely produce on the market and (2) is unable or unwilling to bring money to the closing. The seller may or may not be in pre-foreclosure.”
Therefore, in a short sale, the seller arranges with their mortgage lender to accept a price that is less than the amount they owe on the property. As a result, the seller avoids going though a foreclosure, and the lender avoids taking on the burden of selling the property.
Short sales are considered preferable to foreclosures because short sales lessen the impact a foreclosure can have on the surrounding community; further, short sales will not damage the distressed owner’s credit as much as a foreclosure. (Please note: News reports have disclosed that some homeowners who have signed up for the government’s mortgage assistance program have been surprised with lower credit scores. While the impact on one’s credit is far less severe than a foreclosure, homeowners should be made aware of any consequences to their credit scores if they seek government assistance. If you are considering such assistance, make sure you are knowledgeable about all the pros and cons of doing so.)
If a short sale has been determined to be a distressed homeowner’s best option, the real estate professional must thoroughly qualify the homeowner. In the qualifying process, the real estate agent establishes if the owner is a short-sale candidate by exploring the following criteria:
➢ Whether or not the homeowner has a valid hardship
➢ Whether or not there is sufficient time to accomplish a short sale
➢ That the homeowner will contract or has already contracted with appropriate finance, tax, and legal professionals
➢ The amount that is owed on the property
➢ Whether or not the homeowner has liens in addition to the mortgage; for example, tax liens
➢ The condition of the property
➢ That the homeowner will be cooperative in completing the short-sale documentation and in maintaining the property for showings
It is important to note how lenders define what constitutes a valid hardship (an event or events that change a homeowner’s ability to keep current in mortgage payments). For example, lenders may consider short sales for homeowners who have experienced any of the following: job loss, business failure, illness and medical costs, divorce or death of a spouse, and/or natural disasters. From the bank’s perspective, loss of equity is not considered a hardship.
Once a seller has been qualified, setting the right price becomes of paramount importance. Real estate agents should counsel sellers to set the price at the low end of fair market value. The goal is to attract the interest of buyers, as well as obtain a price that the bank will accept. And while there is not a standard formula for what the bank will accept on a short sale, NAR reports “Freddie Mac has stated that their target sales price on a short sale is 88% of the broker price opinion.”
If you believe you are heading toward a short sale, please note the following: short sales require substantial documentation and responsibility for preparing the documentation is largely the seller’s. It is imperative that sellers list with real estate agents who are deeply knowledgeable about short sale protocol. Further, it is essential that one seeks the expertise of qualified finance, tax, and legal professionals.