How Does a Short Sale Work: 5 Things to Know
Short sales are an established option in the world of real estate. While rarely the first choice for those selling their homes, a short sale can be a useful course of action in the right circumstances.
A strong knowledge base of short sale information can help you understand the situations in which a homeowner might turn to them, as well as how to better work with clients who want to pursue this option. Let’s look at some of the most important things to know about this real estate concept, including answering the question “how does a short sale work?” and much more about short sales.
1. How does a short sale work?
A short sale occurs when, in simple terms, a homeowner sells a piece of property to a buyer for less than the total value remaining on the property’s mortgage. This results in no money going to the owner. Instead, as Investopedia pointed out, all of those funds make their way to the financial institution that owns the mortgage. In some cases, this means the seller still owes money to their lender and must repay it over an agreed-upon time frame. In others, the bank will agree to forgive part of the debt in order to recoup the majority of its investment, or be legally required to do so by state law.
Because the seller is left with no profit from the transaction, a short sale is usually not the most desirable option for a property owner. However, there are situations where a short sale is more preferable than continuing to own a piece of property. A short sale is less harmful to an individual credit rating than a foreclosure, as Bankrate pointed out. If these are the only two options for the owner, then a short sale is the logical one. A homeowner facing financial hardship may choose to engage in a short sale. Specific issues may include generally struggling to make mortgage payments or a major life event, like the long-term loss of a job or a medical condition that stops them from earning income for an extended period.
Beyond this important context for the seller and lender, a short sale is generally the same as a regular purchase for the buyer. The timeline can extend due to the need for the seller to gain approval from their lender for the deal and share necessary information with that financial institution, however.
2. How long does it take for a short sale to go through?
While the specifics can vary greatly from one case to the next, having an idea of how long the short sale approval and sale process generally takes is very beneficial. The Balance assembled an average timeline of a short sale, noting that the many steps of the process and the time required to address them often add up to a roughly three-month period between approval and closing escrow. Add in another 30 days to show the home and secure a buyer’s interest, and a short sale can take as much as a full third of a year.
3. Why does the short sale purchase process usually take longer than a regular purchase?
The term “short sale” refers to the deficit between the sale price and the value remaining on the mortgage – not the length of time it takes to complete the deal.
A short sale property requires that the seller and lender for the seller’s current mortgage take additional time to document specifics and reach a mutually agreeable resolution. This often means additional time is needed to complete the transaction, so buyers and their agents need to be prepared for an extended wait. If delays occur, like a buyer losing their will to purchase or the current homeowner’s lender requiring more documentation in the short sale package before providing approval, the timeline can extend further. Real estate agents for both the buyer and seller need to keep this timeframe in mind as they embark on a sale or purchase of short sale property.
4. Does the seller still owe money after a short sale?
The answer to this question can change from one situation to the next. In some situations, a short sale will involve an agreement between the seller and their lender. That accord absolves the seller from an obligation to pay the difference between the home’s sale price and the amount owed on the mortgage. Laws in certain jurisdictions can protect an owner engaging in the short sale of their home from additional collection efforts by a lender. However, a seller might be required to compensate their lender, paying the mortgage amount in full. In these cases, the lender will seek out a deficiency judgment from the legal system to enforce repayment.
Because of these varied outcomes and the power, or lack of, that a lender can have in requiring full compensation, it’s vital for an owner attempting a short sale to understand their specific situation. The lender’s openness to considering and approving a short sale is most important in the very short term, but an understanding of whether the buyer will still owe money, and if so, how much, after the transaction, is also critical. Real estate agents working for short-sale sellers should make sure their clients have a firm grasp of the situation and have completed the necessary steps that allow a short sale to occur.
5. What are the benefits of buying a short-sale home?
A short-sale home offers buyers who can wait out the extended process an opportunity to potentially purchase a home at less than its full value. Careful review of appraisals and trends within the area are always important, but a short sale can present a valuable opportunity.
Support for real estate agents and brokers making short sales
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