After participating in a recent short sale transaction, it’s a wonder that the word ‘short’ is anywhere in it’s name. ‘Short’ certainly does not refer to the amount of time it takes to find out if you can buy the property… Nearly 6 months passed after making the offer and the closing took place a mere 7 business days after the lender agreed to the negotiated sale price amount.
Becoming more and more common today, short sales are the preferred method of clearing poor performing loans off a lender’s books. In addition, a short sale breaks a homeowner of a mortgage obligation without the property going into foreclosure.
So, what makes a short sale ‘short’? Typically, it means that the lender(s) sell a property for less than the total mortgage amount owed. Sometimes the homeowner’s debts are forgiven (but not always) by the lender and it is less damaging to the homeowner’s credit than a foreclosure. And quite literally the bank takes it in the ‘shorts’ too.
When a homeowner gets behind in their payments or quits paying altogether, their lender often moves to foreclose on the property. However, some lenders have determined that their best bet to recover the amount owed (often recovered more quickly also) is attempting a short sale rather than foreclosure. The bank’s ability to borrow from the Federal Reserve is affected with a foreclosure on the books and it is more expensive. Hence, the motivation to ‘sell short’ and take the loss.
Today, lenders are slow to respond and can be overwhelmed during this current mortgage flop, often too with a smaller staff. Since the bank, not the homeowner, decides on the sale amount in a short sale, you are at their mercy of it’s motivation to move the process along. Once the mortgage company gets to the short sale offer, the lender has to determine if they will accept the amount offered for the property. The lender can counter your offer if too low or outright reject it. A third party appraisal can through a wrench in the deal as almost always the offer will come in well under market value of the home.
Should the lending institution decide to take your offer, be prepared to proceed quickly! If you have trouble getting your finances together by the bank’s desired (often required) closing date, you’ll probably lose the deal. If you’re looking at short sales in your neighborhood, go for it, you have very little to lose other than your time. Some deals are outright unbelievable if you look closely.