Short sale according to Investopedia ” is when a financially distressed homeowner sells their property for less than the amount due on the mortgage. The buyer of the property is a third party (not the bank), and all proceeds from the sale go to the lender.
It 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 is not to be confused with a Short Settlement.
A short sale has two intrinsic and inseverable components. A Short Sale is successful when (1) a lienholder(s) (a.k.a. Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arm’s length sale at or below the Appraised Value for that property.
The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property’s Appraised Value.
A short sale may occur when the lienholder expects that a mortgage will likely never be repaid and the home’s value (due to the home’s condition, such as if a prior homeowner vacated the property and left it damaged or trashed, or general economic conditions in the area or nationwide) will not (either quickly or at all) regain equity to allow full payment of the mortgage.
It’s important to understand that a Lien holder is not bound to accept the Appraised value and can demand a greater selling price. In this case, a “Sale” with a prudent arm’s length buyer is no longer a reasonable or attainable expectation. Instead the demand for greater than the Appraised Value (but less than the amount owed on the debt) is called a “Short Settlement”.
Some Lien holders will agree to a Short Sale but not a Short Settlement while demanding greater than the Appraised Value. This is a paradox as neither is achievable and both predestined for failure.
Therefore, a “Short Sale” can only be accomplished when a Lien Holder is willing to accept less than what is owed on the debt while also agreeing to accept a sales price that is at or below the appraised value for the property.
Creditors holding liens against real estate can include primary mortgages, second mortgages, home equity lines of credit (HELOC), homeowner association liens, mechanics liens, IRS and State Tax Liens, all of which will need to approve the sale in return for being paid less than the amount they are owed. The lien holders do not have to agree to accept less, but they often do since the alternative is to let the property go to foreclosure.
A short sale is a more beneficial alternative to foreclosure and has become commonplace in the United States since the 2007 real estate recession. Other countries have similar procedures. For instance, in the UK the process is called Assisted Voluntary Sale. While both short sale and foreclosure result in negative credit reporting against the property owner, because the owner acted more responsibly and proactively by selling short, credit impact is less.
Real Estate Investing : Property Selling For Less Process : Short Sale
1. Contact the Primary Lien holder and submit an application to be accepted into their Short sale Program. Lenders will not entertain any short sale contract with a buyer unless the home owner has first been approved for their program.
2. The Lender should verify that any government programs, such as Home Affordable Foreclosure Alternatives (HAFA) eligibility, are explored, including relocation assistance to the borrower.
3. Once approved the Lender should provide the terms of the short sale. Terms can include forgiveness of any deficiency, money incentive for a successful closing, property must be listed by a certain date, and many other incentives.
4. Interviewing real estate agents and selecting the most qualified person to handle your short sale (if you have not already selected a listing agent).
5. It can be helpful to obtain Broker Price Opinion letter to establish an estimate (not an appraisal) of the property’s current market value. This BPO’s must use comps in your immediate market. The property should be listed at a greater price to show the Lender you are trying to get the highest possible price.
6. Monitoring the listing to ensure that it is proactively handled.
7. Negotiate with Junior Lien holders for a reduced payoff. Junior Lien holders will get nothing in the event of a foreclosure (that qualifies for a short sale) therefore they have every incentive to settle for something rather than nothing. Junior Lien holders are permitted to pursue a personal money judgment due to any deficiency this creates. Negotiating to eliminate this is paramount for the borrower.
8. Submitting the short sale offer to all lien holders and negotiating with them to obtain approval of the sale.
9. Working with the lien holders to obtain release of any deficiency liability.