All About Short Sales

by Marie de Espinosa

What is a Short Sale?

This is a question I am hearing from both Buyers and Sellers these days. For a Seller the short sale is a method and an opportunity to sell a home that is worth less than what is owed on it without bringing any money to the table.

For example, Mark and Mary purchased a home in 2005 and now they need to sell it— the home has become unaffordable. Perhaps there is a job loss, a rate adjustment or just a reality check. In some circumstances there is a need to move for work, but the employer will not provide moving assistance benefits.

Let’s say Mark and Mary purchased the home in 2005 for $250,000 and now it is worth $220,000; based on a professional Broker’s Comparative Market Analysis (CMA). A CMA looks at all recent sales and compares them with your home, to come up with a realistic selling price. Let’s say Mark and Mary put 3% down on an FHA loan, and have a balance very close to their original loan amount of $242,500 (since much of the first payments go towards interest). In order to sell their home for a realistic price of $220,000, they will need to bring $22,500 to the closing table when it sells, just to pay off their loan. They cannot afford to ride out the market and live there, for whatever reason. This is when a short sale occurs.

The Seller approaches the bank and asks them to take less than the original loan amount for the loan. In addition, Mark and Mary may not have the funds to cover the real estate fees associated with a sale. These are closing costs such as taxes, transfers and title fees along with 6% a Broker typically charges to the Seller for marketing and selling the home. If nothing can be paid towards these expenses, they are also requested of the lender.

Why would the lender accept less and contribute to the sale of the home? Often times, in order to avoid a costly foreclosure. Foreclosures are very time-consuming and expensive for lenders. A Seller in this situation needs to be able to prove financial distress. Late or missed payments, financial documentation and a letter explaining the situation is what your Broker needs to get the ball rolling.

What proceeds is a fairly typical sale scenario. The Seller lives in the home, maintains it, makes it available for showings and continues to provide whatever documentation is requested of the Lender. The Seller in the scenario typically does not make any more payments once the request is submitted.

For Buyers, Short Sales can be value opportunities Buyers submit their offers and they are presented to the bank—who wants to unload this property and get paid. It does take some patience; there are more short sales than the banks can now handle and there is not enough staff to deal with them all. However, for a Buyer who wants some extra value in this market, it’s a great option.

I have experience selling and buying Short Sale homes for my clients and this is just an overview. For specific information to meet your needs, send me an eMail or just give me a call at (720) 275-3926. - Marie