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"Short" Sale or Regular -- Your Choice
I've written about "short" sales before but if you just came in here's a "short" explanation: Short sales occur when the Seller cannot sell their home for the amount they owe on the mortgage. They are "short" of what they need. Sometimes this "short" amount can be small but most of the time it is quite significant. Here is what happens: Let's say someone bought a home about three years ago with an Adjustable Rate Mortgage (ARM) or interest only mortgage or some other "creative" mortgage that allowed them to buy a house. Everyone thought (including lenders) that house values would continue to rise and when push came to shove homeowners could refinance and keep their payments low or, at least, affordable. Unfortunately, home values did not continue to rise. At some point homes became unaffordable even with the most "creative" mortgage available. Additionally, all those "adjustable" rates started to adjust. Instead of paying 4.75% or 5.25% people's rates were adjusting to 6% plus. This caused their monthly payment to go up by a thousand dollars or more in a lot of cases. Homeowners could not afford the "new" payment and they wanted to sell their home to get out of the mortgage. Even rent was cheaper than the "new" payment. Here's where the problem came in. Prices not only did not continue to rise, they fell slightly. Now, the homeowner owed more on his mortgage than his house was worth. He was "short". The biggest challenge with short sales is that a "third party" needs to be involved. That's the bank. Since the bank is going to take a loss on the sale of the house they have to agree how much of a loss they are going to take and approve any offer that is put forward. It's not as simple as throwing out a number to the Seller and getting a house for cheap. If it was we wouldn't have the huge number of houses on the market. No, the bank needs to say "yes". That process usually takes anywhere from 6 weeks to three months. Meanwhile, the potential home buyer is waiting around to see if the bank will approve the offer or counter offer or reject the offer completely. You see, the banks do not have to accept the offer. If they think they can get a better offer if they sit on the property for another month or two, they will. After all the bank employees (the loss mitigation department) have a place to live and a roof over their head and they are most concerned about the numbers. Let's look at another scenario: a Seller wants to sell their house to move to a different area because of a job opportunity or they're getting ready to retire and want to downsize or there may be dozens of other reasons. Let's say this particular Seller bought their home before the year 2000 and they got a "plain vanilla" 30-year fixed rate mortgage with anywhere from 10% to 20% down payment. They have plenty of equity in their home to pay the balance of their mortgage and maybe even help the buyer with closing costs. Let's say this Seller really wants to move and they understand the housing market is in a pretty challenging situation. Let's say they agree that they should price their home very competitively. Low. Here's your choice: Put an offer on a house in a "short sale" situation that needs "third party approval" and wait an extended period of time for a response and maybe or maybe not get the "deal" you were hoping for.....or.... put an offer on a similar home priced at or near the same price but without having to deal with a "third party". In other words, your Realtor and the Seller's Realtor work out all the details within a couple of days and you move into your new home in 30 days instead of six months. Seems pretty clear cut, doesn't it? |
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Best description of short sale I've ever read (though I suspect the situation is a bit different in these post-meltdown times).
 | | nick Dec 21, 2009 13:32 | |
CONTRIBUTOR'S REPLY
Thanks, Nick. You're right. I wrote this prior to the meltdown. Things are still pretty bad. There's talk of US Treasury regs coming down that are supposed to speed up the process but I'm not holding my breath.
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