What is a short sale?

A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished.

A short sale refers to a transaction when a buyer can purchase a home for less than the remaining loan amount. The advantage is the short sale buyer can save a significant amount on the purchase price, as long as the buyer is willing to take part in a more complicated transaction. The transaction is more complicated because it requires both the lender and the homeowner to agree to the purchase price, as opposed to a "normal" sale when the homeowner can make that decision on their own. This is because the lender will receive less money from a short sale than they would have received if the homeowner paid the full amount of the loan.

A. WHO BENEFITS FROM SHORT SALES?

All parties involved in the transaction benefit. The lender benefits by avoiding the costs of foreclosing on the property, which are often higher than taking the loss on the loan. The homeowner benefits by avoiding a foreclosure, which can damage his or her credit history and raise the costs of borrowing money in the future. The buyer benefits by purchasing the distressed real estate at a discounted price, since the homeowner and lender are both highly motivated sellers.

B. WHERE DOES A SHORT SALE BUYER BEGIN?

There are two things to keep in mind when thinking about doing a short sale. As the buyer, you need to approach the homeowner to start the short sale process. This is because the majority of banks will agree to a short sale only after the homeowner has received a formal offer. Also, make sure that there is a pre-work out agreement, or short sale package, between the lender and the homeowner. This agreement helps make sure the short sale negotiations will go smoothly.

C. CREATING A SHORT SALE HOUSE

First, locate a property where the debt of the homeowner is more than the amount the property can be sold for. Approach the homeowner and make a formal offer on the property. Keep in mind a short sale can take anywhere between 1-6 months to complete. You'll need to line up a set of documentation to submit before a short sale can be approved. These documents generally include: a short sale application, tax returns, pay stubs, a hardship letter, a purchase agreement from the buyer, financial statements, and payoff letters from all lenders involved. After submitting the documentation, it generally takes 2-6 weeks to receive lender feedback on the application. Don't be discouraged by the wait. Remember, the goal of the short sale buyer is to obtain property at an amazingly low price. It's worth the wait.

D. PRE-WORKOUT AGREEMENTS

Most lenders require a pre-workout agreement prior to starting workout negotiations. Pre-workout agreements can take a variety of forms that range from a brief letter to a detailed contract that lays the foundation for future negotiations between the defaulting borrower and the lender. A well-written agreement establishes the history of the loan and the procedure for negotiating the short sale. It protects the borrower by preventing the lender from pursuing foreclosure on the property during the workout and allows the lender to avoid potential lender liability claims and defenses against their right to foreclose.

 


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