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How do I know a Short Sale is Right for Me?

How do I know a Short Sale is Right for Me?

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Photographer: Eric Muhr | Source: Unsplash

Is a short sale a good idea? Well, that depends. As with any kind of investment, there are many points to consider before making a final decision.

For instance, are you selling or buying the house? What is your financial situation? These are all relevant points. In order to decide, you need to understand what a short sale is, its advantages, possible mistakes that you may commit and how it all applies to your specific situation.

What Is a Short Sale?

Life is full of ups and downs. Sometimes you commit to huge investments and then something happens. You can lose your job, for instance, and only find another one that pays considerably less. If your investment was a house and you've still got a mortgage to pay, then you can face a real problem.

The failure to pay the mortgage will damage your credit score and it can lead to a foreclosure. Fortunately, most banks never want to go down that road because everybody loses. So, in order to avoid trouble, several lenders can agree to have a short sale.

What is a short sale, then? It’s when someone decides to sell a residence for less money than what the person owes to the lender. The rest of the payment is forgiven.

Let’s look at this example. Someone still owes $200,000 to the bank for a house that originally cost $300,000. With a short sale, the person can sell the house for $175,000 and the bank will forgive the other $25,000.

Why would a lender do that? Wouldn’t it be losing money? Actually, no. Short sales can only happen during very specific situations that protect the lender.

In order to participate in a short sale, some rules have to be followed. The first one is that the house needs to be valued at less than the amount of money that the person paying the mortgage owes to the lender. This means that its value needs to have decreased considerably before now and the current owner has negative equity.

In the example from before, the house, which was bought for $300,000, would need to be valued at less than $200,000 now.

The other rule is that the lender needs to give permission in order for the deal to move forward. Without this agreement, nothing happens.

The Advantages Of A Short Sale

Short sales can present several advantages for both the buyer and the seller. Most of all, though, they present a huge advantage to lenders: they lose less money this way. The main reason for them to accept these deals is that they know that they have already lost the money anyway.

As the value of the house has gone down and the person who bought it is not even paying it anyway, any profit is profit.

The buyer can also benefit, because he/she has already lost money in this investment. For both the seller and the lender, a short sale can be great because it is really a way out of a huge mess.

That said, there are additional advantages to the seller. Your credit score will probably recover quickly after the sale is done. You can also avoid foreclosure, which is always a huge headache. The main advantage, obviously, is to go mortgage-free and finally have some peace of mind without owing a huge amount of money.

If you are a potential buyer, though, you should be asking yourself: don’t I get any advantages? Well, you certainly do, although they are not as big as theseller's.

Short sales are a great way to buy houses way below their market value. You can get huge discounts if the prices are considerably low and the house has no problems. This, however, is when most investors make a mistake. They do not know all the pitfalls that a short sale can bring if they are not careful.

The Most Common Mistakes During a Short Sale

If you are a buyer, this advice is for you: take care. Buying a house during a short sale means that there are considerably more chances that it may have issues. The last owner probably had financial troubles, so many things about the property may not be in order.

For instance, utility bills may be unpaid. Repairs may need to be done. Be sure to make an inspection before closing the deal. Sometimes that great investment is not really good when you see how much money you will spend later to fix it. Buying a house that does not need a lot of repairs is the best idea if you really don’t want to spend a lot of money.

Another good idea is to always visit the house accompanied by professionals. They are trained and will help you to spot any problems that may turn into inconveniences in the future.

It is also very important to consider is that there is a long wait before a short sale. The timeline for waiting for an answer can be a real pain for you if you are not willing to wait a lot. Offering a big payment can help you, but there are no guarantees.

You should know that other people may be interested in the house as well and that they may be the ones who will get to buy it. There is not much you can do about that, unfortunately.

Do Your Homework: Research Before The Short Sale

While a short sale can seem like a great idea at first, being prepared is essential. Whether you want to sell or buy the house, researching a lot is a necessity.

If you want to sell the property, you should do the math and determine if getting rid of this problem by losing the house is worth it. Sometimes, if you can pay the rest, it can still be a decent investment. However, in some situations (such as not having the money to pay at all) selling the house is the best outcome.

In case you are looking to buy a new home, you should check your priorities, follow all tips about the most common pitfalls and really do a lot of research about the property and its condition before deciding.

Four Things You Should Know About the Short Sale Process

Four Things You Should Know About the Short Sale Process

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Banks don't want to lose money. The bank is absolutely going to lose a lot of money if someone forecloses on their house – but less so with a short sale process.

Foreclosures are what happens when the owners can't pay their mortgage and the bank sells the home to the highest bidder, trying to recover some cash, as they're technically negative on that house. You can see some homes, that are valued at $200,000 or more, foreclosing for under $100,000.

It's a great deal for the buyer, but not such a great deal for the bank. A short sale, on the other hand, is a step above a foreclosure. The bank is still going to lose some money in the transaction, but not nearly as much as they would with a foreclosure.

And if you're looking to buy a house, happening upon a short sale seems like you've hit the lottery – but the short sale process isn't for the faint of heart. Want to learn more about it and see if it's the right strategy for you? Keep reading.

What is a Short Sale?

Imagine that you bought a $200,000 house. You put 50,000 down as a down payment (good for you!) so your mortgage is 150,000. Now for whatever reason, you can't afford your mortgage anymore. You can't pay your bills and a foreclosure is looming.

What do you do? You, as the seller, could look into a short sale. You put the house on the market at a low price, and collect offers. Then you go to the bank and tell them "we can't afford to pay back all 150,000 – but would you accept one of these 50 offers that are less than what we owe, but aren't as costly as a foreclosure?".

The bank then looks through the offers and says yes or no. If they say yes and accept a particular offer, the people essentially sell their mortgage for less than it's worth back to the bank, in exchange for their home.

But do you see the catch there? It was hidden, so if you didn't, no worries. Here's the issue: short sale homes can collect tens or even hundreds of offers. That's not such a good thing for a buyer, who thinks they're getting an unbelievable deal and are just "waiting on the bank's approval".

In reality, there's a very, very small chance that a buyer's offer is accepted on a short sale home, just due to the volume of offers.

What is the Short Sale Process?

That's not to say that a buyer can't get a house at an unbelievable deal with a short sale. It's entirely possible – but you can't get too emotionally attached to one house (or one low price). If you want to "win" a short sale, here are four things you need to know.

1. Bulk it Up

If you're determined to get a house for a really good price through a short sale, you have to put in offers on a lot of houses. One investor who makes YouTube videos says he and his team put in 100 offers on different short sales every day.

Then, months later, they might win 1-3 out of those 100 short sales. It can take that long and be that competitive.

And here's the issue with that for most people. They don't have the capital to go through with three short sales, even if we were to win them. So how do you amend that strategy for someone with a more realistic budget?

Keep putting in offers on short sales, but don't do 100 a day. Maybe do one every other day, if the house is in your area. A short sale isn't something you want if you have to move in ASAP. It can be months before the owners even take the offers to the bank, let alone get them approved.

2. Know When to Engage in the Short Sale Process

Short sales are not quick sales, even though the "short" in their name makes it sound like they are. It takes longer to go through with a short sale than it does to buy a house the conventional way.

That's to say, you have to know when to start the short sale process. If you're just starting to think about moving but you still have six months to a year, then you could play the short sale game. But if it's May and you have to move by August – skip the short sale process.

If you put all your eggs into that basket, you could very well find yourself moving into a too-small apartment and still waiting on approval come August.

3. Make a Higher Offer

One good way to get a head start on short sales is to research the true market value of the home. Sites like Zillow make this easy, and you can see what homes around it are worth. Now – you absolutely shouldn't offer the full market price.

That defeats the purpose of a short sale. But if it's listed for 50% of what it's worth, come in at 70% or even 75%. Remember – you don't really care what the owners think of the offer, it's more about what the bank wants.

And the bank is going to lose money on this sale, no matter what. So if you can make that gap smaller for them, they're more likely to approve your offer.

4. Be Very Patient

If you haven't figured it out yet, short sales aren't for people that lack patience. You're not just going to get that good of a deal without paying some sort of price. In this case, the price is time.

If you can put up with waiting then you're ready to play the game.

The More Offers the Better

Now that you know about the short sale process, what do you think? Will you try to get a home for a good deal, even if it means waiting a while? Let us know.

5 Reasons a Short Sale is Your Best Option

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Often people hear about the concept of a short sale and think it means the homeowner is in default on their loan. But that’s not always the case. Default is not necessary with every short sale. And not every short sale is caused by foreclosure.

Short sales occur when a bank decides to take a lower payoff than the overall balance of the loan. The amount of the mortgage is not a crucial component. What’s significant is your home’s price and market value. If your house is worth more than the mortgage, you may do a short sale.

This can be done as long as the net profit is below your loan’s total balance.

Despite common beliefs, your house doesn’t have to be underwater or upside down to do a short sale. An “underwater mortgage” is a home loan that has a greater principle than the value of the house on a free market.

It’s the bank’s net proceeds that determine if the house can be a short sale. If the sale’s net income is less than the outstanding balance owed on the loan, that home will be a short sale. This can happen even if the property is worth more than just the mortgage.

Here are 5 reasons why a short sale can be your best option:

1. You Can Short Sale Without Defaulting

 While many short sales involve a residence in foreclosure, a pending foreclosure doesn’t always mean a short sale.

To prevent making mortgage payments, not every bank needs a short sale. Some people can actually qualify for a short sale without being in financial difficulty.

With banks, just the chance of a default on a loan can qualify the seller for a short sale. The seller doesn’t always need to be behind on the loan.

If a seller can initiate a short sale without reporting late payments on a loan, this can lead to a stronger FICO score for that seller, rather than the alternative ding to one’s credit.

2. You Can Stop Worrying about Foreclosure

 There are numerous reasons why a borrower may not be able to make mortgage payments.  Financial hardships and unforeseen life events are completely understandable.  “Expect the unexpected,” right?

When you fail to make your mortgage payments for anywhere between 3 to 6 months, the failure to pay is usually met with a notice of loan default.

If the borrower wants to try and stop the home from going into foreclosure, they can attempt to enter a settlement of the debt with the lending bank. This settlement is what’s done in the form of a short sale of the home.

3. You Can Save Your Credit Score

 From an individual credit score perspective, a short sale is extremely preferential, particularly when judged against the possibility of foreclosure.

Credit scoring companies take a dark perspective on foreclosures and will file a lower credit score than to someone who carefully examined their options and decided to go with a short sale as the alternative.

Not only does it protect a person’s credit score, but it also keeps them in the playing field and allows for an easier home buying process in the future.

4. You Can Preserve Your Future of Home Buying

In many cases, the largest financial moment in an individual’s life is buying a home and taking on a mortgage. Preventing the worst case of a foreclosure, a home seller can more easily justify a short sale, such as deciding to move elsewhere for example.

On the flip side, buying a home after a foreclosure, and the resulting destruction of a person’s credit will be nothing less than a nightmare and a half!

5. You Can Avoid the Sales Fees

 

With the traditional sale of a house, the seller carries the strain of payments and fees. This includes paying commission rates to employed real estate agents.

These real estate agent fees can generally cost the seller up to six percent of the final sale of the house. But with a short sale, these fees and commissions are paid to the agents by the bank.  Direct savings for the seller!

Short Sales: Summarized

Typically, an interested buyer will make an offer that meets the values of the property. But often a seller is not in the position to accept such an offer, because the bank is the deciding factor.

In these instances, the lender must approve such offers since they are lower than what is owed on the home loan itself. The seller would then complete an application for a short sale along with the supporting information to be submitted to the lender.

This supporting information may include a letter indicating the seller’s hardship and the reasons for the inability to pay back the difference of the potential offer from the buyer.

Often, proof of income, as well as tax returns, are needed to show evidence of the hardship. An appraisal of the home will be done, and if it ends up reflecting a home value that matches the offer from the potential buyer, the bank may choose to accept it.

 

Other Considerations for Your Short Sale

Remember, this is not a quick or easy process.  It usually takes several months to go from start to finish. To make up for its financial loss, the bank will often require that the home buyer pays for the closing costs of the home as well as repairs.

Once your short sale is complete, the debt is settled, and you are free from the debt and payment. To sum it all up, a short sale is much better for your credit score and your future than a foreclosure is. So, remember, your best bet may very well be a short sale.