Be Wise About Short Sales in Real Estate

1. What is a Short Sale in Real Estate?

• Short Sale Definition: A Short Sale in Real Estate is a transaction where the net proceeds realized from the sale of real estate listing are not enough to cover the seller’s mortgage obligations and closing costs, such as property taxes, transfer taxes and real estate practitioner’s commission.
• A Short Sale in Real Estate is where the bank or mortgage lender agrees to discount the loan balance of the mortgagor because of economic or financial hardship.
• The proceeds from the “Short Sale” that the lender receives are then viewed as the full satisfaction of the loan (not in all cases).
• Short Sales can be beneficial to all parties - the lender, mortgage holder and new buyer.
• The Seller loses his home through a Short Sale and is left with no money in his pocket, making it much more difficult to purchase another home in the future.

2. What is the Nature of a Short Sale in Real Estate?

• The large number of parties involved, short sale processes and short sale regulations make this rather intricate and extremely specialized kind of real estate transaction. Consequently Short Sales have a high failure rate and frequently do not close in time to prevent foreclosure if it is not handled by well-informed and experienced professional.
• The first person you should contact is a Realtor. Your Realtor will work hand in hand with an experienced Title Company, who will then contact the Lender(s) to obtain the name of the loss mitigation specialist assigned to the file and will request a short sale package from them. The Title Company then provides a copy of the package to the Listing Agent and Seller, so that the Seller may compile all requested documentation to be submitted to the Lender(s) for Lender(s) approval. The title company will perform the Title Search, Title Examination, and Lien Search, which are necessary for preparation of the Preliminary Net Sheet (HUD-1). The fee paid in advance to the Title Company should be around $250.00 for these services. Do not be hoodwinked by anyone requesting exuberant fees in advance. The balance of the Seller’s fees will be collected at the time of closing as part of the closing costs submitted to the Lender(s).
• Meanwhile, your Realtor, who you have signed a listing agreement with, will determine value of property by preparing a Comparative Market Analysis and place the property on the market to sell. Once there is a fully executed sales contract between Seller and Buyer (which is based upon Seller’s Lender(s’) approval), the offer is presented to the Lender.
• This process can take anywhere from 2 to 6 months to obtain the Lender’s approval and even up to one year. Be patient!

3. What circumstances prevail for a Short Sale?

A short sale normally is considered to prevent home foreclosure. This is normally when loan balance on a property is greater than the prevailing real estate value of the property.

4. When will a Short Sale not be considered by the Lender?

• If the Seller has filed for Bankruptcy – The Short Sale process are considered as a collection activity which is prohibited during bankruptcy.
• If the Seller is far behind in payments - Lenders will normally not accept short sale offers when a notice of default has been issued.

5. Short Sale vs Foreclosure for the Lender:

The decision of the bank or mortgage lender to allow a short sale in real estate is guided by the most economic way for them to recover the outstanding balance on the mortgage. Therefore, if the lender judges that the financial loss from the Short Sale process is less than the foreclosing and associated costs of maintaining and selling the property, they might agree to a Short Sale.

6. Short sale vs foreclosure for the Seller:

• A Short Sale causes less damage to the Seller’s credit record than foreclosure.
• A Short Sale in Real Estate is typically faster and less expensive than a foreclosure.

7. Short sale vs foreclosure for the Buyer:

When the Buyer has a limited timeframe to purchase a Short Sale property, the Buyer should consider a foreclosed property, where the bank already has formally taken possession of the house and will accept or reject the offer in only a few days.

8. Buyer Pros and Cons in buying Short Sale Properties:

• The Buyer will buy a Short Sale property for a substantial discount and often with favorable financing terms.
• There is no commitment by the Lender in selling the Short Sale property at time of offer and it depends on the economic evaluation by the Lender.
• Buying a Short Sale property often has problems associated with it as mentioned above. The Short Sale process gets complicated and is often delayed when there is more than one lender involved, especially where there are mortgage-backed securities in place. Many times the Buyer does not hear back from the lender for weeks or months, so it becomes very frustrating. And more often than not, it is only to hear a rejection of their offer.
• Short Sales often leads to unfilled expectations and often great inconvenience, particularly if the Buyer has sold his previous home.

9. What should be considered in the Short Sale offer?

• When listing the property the Seller needs to disclose that it is a Short Sale property and is contingent upon the Lender's acceptance.
• The Sort Sale offer needs to allow enough time for the Lender to respond.
• The Short Sale offer should allow either party to cancel without penalty.

10. Florida Association of Realtors (FAR) Short Sale Addendum (SS-2 revised 7/08)

A Short Sale Addendum has been designed to protect the Buyer and Seller throughout the Short Sale process. However, it is most important that the Buyer adheres to all the proper procedures and extensions in writing, in order to not put their escrowed deposit in jeopardy. Each transaction is different and the Lender is an essential party in the transaction. Be sure you understand the Short Sale Addendum and what you are agreeing to, as the Buyer.