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Understanding The Short Sale Process

By Elizabeth R. Elstien

Before 2008, properties sold as short sales were few and far between. Today, they make up the bulk of home sales throughout the U.S. and Rhode Island is no exception. Everyone has heard horror stories about a home bought as a short sale, but what exactly is a short sale and how does it differ from conventional and foreclosure sales?

Types of Property Sales

Conventional. With a conventional sale, the home is worth the same or more than the remainder of the mortgage loan. Therefore, when the owner sells the home through a real estate agent, the sales price will pay off the loan in full and usually give the owner some extra funds to use for a variety of reasons, such as a down payment on another home or a college fund. The mortgage lender is not involved in the sale transaction and is happy as long as the mortgage gets paid off when the sale closes. Depending on the type of loan the buyer is acquiring, the sale will usually close within two months. With no lender on the buyer's side, cash sales obviously close much sooner.

Foreclosure. Foreclosure sales are also known as Real Estate Owned (REO) sales. These sales occur when the mortgage lender legally takes back ownership of the home due to owner default on numerous monthly loan payments. An owner who defaulted must leave quickly, has nowhere to go and is angry at the lender for taking their home. Oftentimes homes sold as REO properties are dirty and in bad condition with few to no appliances, as the former owners either had no funds to maintain the home due to loss of income, sickness, etc. or were so upset that they purposely took everything possible out of the home when they moved out.

Foreclosure sales can go through as quickly as one month, as the owner/seller is now the lender who is not in the business to buy and sell property, but just wants to quickly obtain funds lost in the foreclosure and move on. Therefore, the lender wants to get the most money possible out of the sale as fast as possible leaving REO homes normally sold "as is" and with little room to bargain on the sales price. A lender may also have preferred buyer loan types and won't take loans that typically take longer to process (FHA, VA). Cash talks, as always. Lenders with REO homes to sell commission a real estate agent to sell them. So while a buyer will deal with the lender's/seller's agent, negotiating and signing contracts will only be done during lender's hours: daytime, Monday through Friday.

Short Sale. As the name sounds, a short sale means the value of the home has greatly declined since it was originally appraised and the owner's/seller's mortgage loan was approved. This means that, unlike with a conventional sale, the sale of the home in today's market will not pay off the owner's/seller's mortgage loan. Sometimes the seller has missed mortgage payments and wishes to sell before the home is foreclosed on and other times the seller simply needs to move for a new job or other reasons. With the huge number of short sales on the market in recent years, lenders are inundated and cannot keep up with such a high volume.

As with a foreclosure sale, the lender is very much involved in a short sale. But the difference with a short sale is that the home has not been foreclosed on and the owner is selling the house and may be still living in it. Real estate agents representing each party deal with the contracts and negotiations, as in a conventional or foreclosure sale. The involvement of the lender makes three parties to the short-sale transaction and helps slow down the process.

Even though the owner is selling the house and signs all the contracts and addendums, everything has to be approved by the lender to meet the bottom line. Because lenders are so overwhelmed with short sales, each sale can take many months to close. The lender can alter the original buyer and seller contract sales price and terms so that it meets or exceeds the lender's bottom-line figure. If the buyer and seller don't agree to the new price and/or terms or negotiate a reasonable counteroffer within a set time, the deal may be over. As the seller is in a deficit, all money gained by the seller in the short sale goes to the lender to pay off the mortgage.

Buyers must have patience and perseverance in a short sale. A buyer should go into a short sale with caution, knowing that she/he can back out at any time before the lender's final contract acceptance (unlike with other sale types). The buyer's agent will only know what the seller's agent chooses to tell. Short sales go smoother if the listing agent, who negotiates the sale with the lender, knows what the lender will accept as the lowest amount, along with any terms they won't accept and forwards the information to the buyer's agent. Lowest amount means sales price minus seller's closing costs.

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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