With the continued influx of foreclosed properties in the Atlanta real estate market, buyers can find great deals and pay thousands of dollars below the appraised home value. Luckily, foreclosures are not the only hot deals out there today. According to the Mortgage Bankers Association, when a bank takes back ownership of the house through the foreclosure process, the bank will end up losing around $35,000 by the time they get the house sold. Because of the cost the bank sustains from going through the foreclosure process, more banks are beginning to take a look at the short sale option.
A short sale is when the bank accepts a discounted payoff on a home loan because a borrower or seller is facing foreclosure. A few reasons a borrower could be facing foreclosure are recent job loss, divorce, health issues, etc. The borrower has to prove that they have a financial hardship and can no longer make their loan payments. Here is simplified version of how the short sale process works:
- The owner of a home facing foreclosure attempts to sell their home, but is now aware that they owe more than the property will sell for. The owner contacts the bank to ask for assistance. The lender will require documentation to prove that the borrower is actually in a "hardship" situation and is in danger of foreclosure.
- The lender contacts an independent appraiser or broker to assess the home's value in today's market. This allows the lender to understand how much they would be willing to sell the home for if they have to foreclose on the property.
- Once the bank approves the short sale, the home is marketed by a real estate agent, at a reduced price to attract buyers to make an offer. At this point, the owner of the home has agreed to receive nothing for the sale of the house in exchange for having no financial liability.
- A prospective buyer makes a formal offer on the property. The offer is typically way below the current balance on the home's existing loan.
- The lender's loss mitigation department processes the requested short sale and attempts to close on the sale before the lender's collection department gets the foreclosure sale completed. At this point in the short sale process is when most of the frustration begins. It can take anywhere from 7 to 60 days before the bank responds to the prospective buyer's offer, and if the property is foreclosed on during that period, the buyer must start the home search process over again.
- The lender will try to determine how much of a loss is likely if they have to take the house back and compare it to the offer on the table from the prospective buyer. The lender's main goal is to lose as little money as possible, so they will likely counter the offer on the table to get additional funds to pay off the existing loan.
- If the lender accepts the borrower's hardship explanation, then a deal is struck and the buyer's offer is negotiated and accepted. Approval to close is given and the buyer usually gets a great deal on the house. Unfortunately, this entire process can take up to 6 months to complete and success is not guaranteed.
So, if you have up to 6 months before you need to move, have the patience to wait weeks on responses from the bank, and to keep emotions out of the purchase since the short sale is not guaranteed and the property could foreclose, then you have the stomach for short sales! As a buyer you can get a bargain on the home of your dreams and the seller can get out of the financial responsibility of the home, but be aware of the potential issues.
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