Before the housing meltdown, the term "short sale" was hardly part of the residential real estate vernacular. But now that about 11 million homeowners owe more than their homes are worth, millions of whom are headed toward foreclosure, the sales method has emerged as an alternative to foreclosure. For homeowners teetering on the brink of losing their homes, short sales may be their ticket to a fresh start.
A short sale is a real estate transaction in which a lender approves the sale of a home knowing that it will not pay off the borrower's loan -- hence, the sale comes up "short." For a seller, a short sale avoids the psychological costs of foreclosure, and softens the blow to his or her credit score. For the lender, a short sale allows it to avoid the costs of foreclosure. And for the discerning buyer, a short sale may mean a bargain deal.
Benefits for a Seller
A short sale offers an upside-down homeowner an opportunity to avoid having to wait up to seven years before her or she can buy a home again, along with other credit dings that come with foreclosure. A short seller will still have to go on a mortgage hiatus, but the break from seeking a home loan will be much shorter. (Experts say it's generally a two-year wait.)
Dodging foreclosure also allows a borrower to avoid the sometimes-devastating psychological impact of the process, not to mention debt-collection calls. Furthermore, assuming the borrower lives in a state where banks may sue for its losses, a short sale may allow a borrower to owe less to a bank than she would if her home sold as a foreclosure, because a home generally sells for more in a short sale than as a foreclosure.
Challenges for a Seller
While the option may seem like a no-brainer if you're headed toward foreclosure, there are serious difficulties in the transaction.
Homeowners are often advised to spend time speaking to professionals to weigh the costs and benefits of pursuing a short sale, especially considering that laws pertaining to short sales vary from state to state. Good sources of advice include a certified public accountant, a real estate attorney or a Realtor who is a short sale specialist.
A homeowner considering a short sale should also be aware that he or she is usually liable for paying the "deficiency" of a short sale, which is the difference between the amount owed on the loan and the proceeds from the sale of the home. In just about all states, says Daren Blomquist, vice president of online foreclosure marketplace RealtyTrac, a bank may sue a borrower after a short sale to recoup losses that result from a deficiency. That means that a borrower may continue to be haunted by the loan even after a short sale.
A homeowner who decides to move forward with a short sale must be ready to commit to a long process. The borrower must complete quite a bit of paperwork before a bank will agree to even consider a short sale, and must prepare a short sale "package" -- documents that include a letter of hardship, tax returns and an appraisal. Also, the borrower almost always needs to secure an actual offer on the home -- no easy task considering the delays associated with a short sale.
The bottom line: For a bank to agree to even consider the possibility of a short sale, it needs everything handed to it on a silver platter.
"I don't think I've seen lenders agree to a short sale before they've seen a contract," said Joe Buczkowski, CEO of LeaseRunner, an online management tool for landlords.
After a homeowner has made his pitch, then the headaches can really begin. Since today banks are tied up with an enormous flood of foreclosure paperwork and refinance applications, it may take upward of three months for a bank to even begin the review.
After a primary lender warms to the idea, second liens against the home -- if they exist -- enter the picture: Holders of junior liens -- like home equity lines of credit and HOAs that are owed money -- will jockey for a portion of the proceeds from the short sale, since they all have claims against the home as well.
By Teke Wiggin
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