Definition of a Realty Short Sale
A short sale is an alternative to foreclosure or bankruptcy whereby a homeowner can sell his house for less money than is owed on the mortgage note. When a homeowner can no longer make the mortgage payment and is facing lengthy foreclosure or bankruptcy proceedings, a lender can may opt to approve a short sale. Factors that can lead to a short sale include loss of employment, homeowners receiving more credit than they are able to repay and home values dipping below the amount left on the mortgage.
Other People Are Reading
-
Foreclosure vs. Short Sale
-
A foreclosure occurs when the lender takes over the title of the home and sells the house itself, usually by auction. A short sale is often sought by homeowners in order to avoid a foreclosure. In a short sale, the homeowner is still the seller, but any offer must be approved by the lender.
Short Sale Steps
-
The first step in a short sale involves the homeowner signing a listing agreement with a real estate agent. This agreement acknowledges the short sale and involves final approval by the lender. Then the search for a buyer begins. Once an offer has been made, the seller must accept or decline it. However, such offers are then subject to the lender's approval. Once the lender accepts the buyer's purchase offer, the transaction moves forward to the closing stage where the buyer delivers the funds to the lender. The lien on the house is released, and the seller hands over the deed to the home's new owners.
-
Qualifying for a Short Sale
-
Banks look at several factors when deciding to allow a short sale. A declining market value that falls below the amount owed on the mortgage is one of the factors taken into consideration, but it is not the only factor. Besides the drop in market value, lenders take into consideration whether the mortgage is in default or is nearing default status. Lenders may take into consideration whether a homeowner has fallen on hard times, such as a loss of income or medical emergency. A short sale becomes a strong possibility if the homeowner has no other assets.
Consequences for Sellers
-
There are consequences for homeowners who undergo short sales. A lender approving a short sale may issue the seller a 1099 for the shorted difference in the transaction, which is counted as income. A real estate lawyer and tax accountant can help sellers determine the tax consequences of a short sale. Short sales will show up on a seller's credit report and therefore affect her credit rating. Sellers may prefer a short sale to a foreclosure, but a creditor may view them as the same. A short sale and foreclosure will have the same impact on a credit score because they are both seen as a delinquency in payment.
Purchasing a Short Sale
-
Those not in a hurry to purchase a home are good candidates for purchasing short sales. Potential buyers must be patient, as the short sale process can take anywhere from 2 months, if there is only one mortgage, to 4 months or more if there are several mortgages. Buyers for short sales will also need to have their financing in order. Lenders will be more likely to approve a cash offer or an offer from a buyer who is preapproved, can furnish a large downpayment and can close at any time. Also, no-contingency offers are preferred by lenders.
Risks for Buyers
-
The short sale process is not without risk for buyers. Offers, especially those that are much lower than the fair market value of a home, may be rejected. The rejection can come after months of waiting. Instead of rejection, a lender may make a counteroffer, which will lengthen the process. Oftentimes, short sales are sold as is, meaning that lenders will not work with buyers on repairs or credit the price of repairs in the final purchase price.
-
References
- Photo Credit Real Estate image by Stephen VanHorn from Fotolia.com
