When a seller doesn't receive enough money from a buyer to pay off their mortgages, this type of sale is known as a "short sale." It's possible that the seller overpaid or took out too much debt in order to purchase the house. The decline in the home market may have caused its fair market value to be lower than the outstanding balance on the mortgage. Although it could seem like an excellent deal for the buyer, these houses are typically sold in their current condition, and the closing process might take longer than usual. A short sale is only made possible if the lender consents to accept less money than what is outstanding on the mortgage that is currently being held. Buyers who are interested in purchasing properties through short sales should be aware of the following potential dangers.
No Discounts Will Be Given for Short Sales
Financial institutions are willing to lend money when the market is doing well. It's possible they'll provide the buyers with a loan beyond what they can comfortably manage. When the market finally bottoms out, the owner is left with very little equity and a mortgage that the sale of the property will not pay off. The purchasers wind up owing more on the mortgage than the home is actually worth. If you buy a home through a short sale for $400,000 and it previously sold for $500,000, then you will not automatically be scooping up an additional $100,000 in equity in the home. The buyer overpaid for the home when the housing market was on the rise. Some appraisers feel pressure from banks to set the value of a home's appraisal at the amount of money a buyer wants to borrow, despite the fact that doing so violates the law.It's possible that agents are trying to rush the sale
When a seller doesn't qualify for a short sale, inexperienced or unethical real estate brokers may pressure the seller into agreeing to a short sale anyhow. Before a short sale may be approved, the seller is required to provide their lender with documentation that they are in a difficult financial position. Some real estate agents may promote properties as short sales without ever having a conversation with the lenders or conducting a pre-qualification of the sellers. When looking into a home, this causes you and your realtor to lose time and may cause you to spend money.Properties are sold "as is" and at their market value.
The value of a home is not something that lenders are oblivious to or naive about. Before they agree to a short sale, they will demand that you provide them with a comparative market analysis (CMA) or a broker price opinion (BPO). If a lender believes that it can recoup a more significant sum of money by foreclosing on the property rather than selling it at the agreed-upon price, the lender may insist on a higher price. In most cases, lenders won't agree to a short sale unless the home is worth the price of the short sale, which is equivalent to its current market value. When a mortgage company agrees to a short sale, it will almost certainly cover all of the closing costs associated with the transaction. Lenders anticipate that you will purchase the property in its current condition. Most of the time, they will refuse to make any improvements or pay for any problems discovered during a house inspection. Some examples of these problems include:- Putting an end to an infestation report
- Repairs to the roof
- Other postponed upkeep and repairs
- Protection for the purchaser of the home
It Might Take Longer to Finish Closing
When a lender receives an offer to buy a property through a short sale, the response time might range anywhere from a few weeks to a few months. It depends upon the date that the seller submitted the notice of default, the number of foreclosures currently pending with the lender, and the amount of paperwork that the seller has previously handed in. It's not a sight out of the ordinary for homeowners to have more than one mortgage on their property. When this occurs, it might add even more time to the process of satisfying both lenders. Some financial institutions maintain the discretion to make late-stage adjustments to the terms of a short sale. If there is a shift in the market, the introduction of new legislation, or the receipt of new information, the lender may try to renegotiate the terms of the contract. In most cases, lending institutions employ in-house legal counsel or retain outside counsel. Ordinary consumers do not, and because of this, it can be challenging to meet their requirements.Higher Commissions Paid to Lenders and Overall Closing Costs
When working on a short sale, real estate agents may do two to three times the usual amount of work, which they dislike. Commissions are often paid to the agents by lenders who have sold loans to Fannie Mae or Freddie Mac. However, specific lenders may demand a discount in exchange for their services. Suppose you have promised to pay your agent a particular percentage as part of a buyer's broker agreement, and your agent refuses to get you out of the obligation. In that case, you may be responsible for paying the difference between the amount the lender will pay and the amount that is stated in the contract. In the case of short sales, lenders almost never pay for "extras" in the same way that a seller might be willing to do so. If you want additional services or provisions during the closing, you will be responsible for paying for them. Most of the time, lenders will not pay regular seller closing costs like transfer taxes and other fees. It is possible that you will have to pay for them out of your own personal funds.There is No Control, and the Sellers Are Not Motivated to Work with You
It would be best if you didn't count on escrow being closed by a particular date. The closing process for a short sale might take a significant amount of time. Not you or your lender, but the seller's lender has the final say in the matter. It is possible that you will not be successful in selling your current house and completing the escrow process for the purchase of a new property at the same time. Be sure that you have a contingency plan in place. Once a seller is aware of the detrimental impact a short sale will have on their credit, there is little reason for them to participate in a short sale. After a short sale, a seller may be able to purchase another home within the next two years; nevertheless, there are some sellers who have no intention of ever purchasing another home again.Being Wary of Real Estate Short Sale –– the bottom line
Even while there is a possibility that buyers will make a profit from a small percentage of short sales, it is almost always preferable to buy a home that is not already in default. Any real estate professional who has been burnt in the past by a short sale that has fallen through is likely to caution their new purchasers away from that particular type of transaction. Also, be aware that listing agents may try to convince sellers to market the property as a short sale rather than a foreclosure since the listing agents fear losing business if the sellers choose to foreclose on the property rather than sell it short.Frequently Asked Questions (FAQs)
How much time does it take to close a short sale?
Although the approval process for a short sale can take anywhere from 30 to 120 days on average, it can sometimes take as long as six months. There are a lot of different things that can affect how long this process takes. For example, if a government agency such as HUD is involved in the process, they could extend its duration. If your lender hasn't given their approval for the sale within the first 120 days, you should probably call out to them and see if there is something that is preventing the process from moving forward.How long does it take for a short sale to be removed from a person's credit report?
If you are the one selling the property in a short sale transaction, it is likely that the transaction will show up on your credit report; however, it will not in the way that you might expect it to. The phrase "short sale" will not be included in the report. Still, if you were behind on payments or didn't pay off your mortgage in full, the account associated with the short sale will have negative marks that are likely to remain on your credit report for seven years.