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Short sale sound like a quick
short and a straight forward transaction. The owners need to sell quick and the
lenders are ready to accept less than the owners owe thus creating a great
opportunity for a buyer. However, the only “short” aspect of these types of
transactions is the “short fuse” which often goes off when the buyers are
waiting and waiting and waiting for this deal to happen. To find out why this is
happening we need to examine short sale process and understand the way banks
think and operate when it comes to short sales.
where the bank assumes ownership, short sale is a process in which the owner,
not the bank, is trying to sell their property. However, the owner will never
get any proceeds from the sale, where in a case of a foreclosure, the owner may
get whatever is left from the sale of the property if the amount is greater than
what they owe to the bank. The bottom line is short sale has to be approved by
the bank and, as you can guess, the procedure is very slow and cumbersome. The
fact of the matter is the lenders are in no way obligated to approve a short
sale transaction, nor they’re eager to complete it quickly.
So, after countless paper work that you need to submit including proof of funds,
short sale application, an approval letter from your lender, letter explaining
reasons for needing a short sale, comparative market analysis report explaining
the value of homes in that area and much more, you find out that the property is
not going to be approved for a short sale by the lender. This is because lenders
in many instances are collecting on the Private Mortgage Insurance (PMI) and
recover their losses from a foreclosure.
If you’re looking for a bargain
my suggestion is don’t try to do it the hard way. Use the tools available to you
to on the Internet, do the research yourself, get knowledgeable, qualified Miami
realtor and start negotiating. After all, free cheese is really free only in a
Foreclosure is a process in which the owner looses it's ownership rights to the
property and the lender (bank) becomes absolute owner of the property. It is a
termination of all rights of the homeowner covered by a mortgage. Foreclosure is
to shut out, to bar, to extinguish a mortgagor's right of redeeming a mortgaged
estate. It is a termination of all rights of the homeowner covered by a
The Foreclosure process begins when the homeowner fails to make payments of the
money due on the mortgage at the appointed time. This may be due to several
reasons: unemployment, divorce, medical challenges, terms of the loan, property
management, and even death.
Foreclosure is applied to any method of enforcing payment of the debt secured by
a mortgage, by taking and selling the estate. Borrowers and lenders now face a
challenging situation. Both seek a compromise that permits a win-win outcome.
The borrower to keep his home or business, the lender to keep receiving mortgage
payments. Foreclosure proceedings typically start with a formal demand for
payment which is usually a letter issued from the lender. This letter of notice
is referred to as a Notice of Default (NOD). Depending on your state, the lender
will issue this notice when the homeowner has been 3 months delinquent on the
mortgage payments. Keep in mind that the notice is a threat to sell your
property, terminate all your rights in that property and evict you from the
Short Sale is when a lender (bank) is willing to accept a discount on a
mortgage to avoid a possible foreclosure auction or bankruptcy.
In this case, instead of buying from the seller, you are purchasing the property
directly from a lender at a discount. Here is an example of how a short sale
works. A homeowner, who is facing foreclosure, has an existing first mortgage of
$400,000. A homeowner writes an offer to the lender for $300,000 and the lender
accepts this offer as a full payment for the loan. Why would lenders (banks) be
willing to take such a discount? There are a few reasons. Banks are not in a
real estate business and therefore do not like to have excess inventory and/or
bad loans on their books; therefore, if they see an opportunity where they can
sell the property without a huge loss, they will do it. In addition, lenders
(banks) know they could lose a lot more money if the property goes to auction.
There are many fees involved if the property goes to auction plus the time it
takes to do it. They would be better off taking the discount beforehand and be
finished with the transaction in a shortest period of time.
Currently, foreclosures are at an all time high in US, which creates more
opportunities for the buyers. Sunny Realty presents a list of Short Sale
properties in Miami and Fort Lauderdale for you to choose from.
Most lenders will accept a short sale for the reason’s , however, you may come
across one or two lenders who will not discount. If the numbers work out for the
lender they will do it.
It is best to do a short sale when the property is in the pre-foreclosure state.
Yes, you can perform a short sale when the bank owns the property, however your
profits will more than likely be smaller. There are two stages within
pre-foreclosure. The first stage being those individuals who are behind on
payments and the second stage are those who are behind on payments with a notice
of default. In order for this to work properly and for you to successfully get a
short sale, you must find the homeowners who are in the second stage of
pre-foreclosure or more than 3 payments behind on their mortgage. Once the
notice of default has been recorded, banks become motivated as well, so you are
more likely to get a discount. Until that time, very rarely will a bank ever
discount a mortgage that soon. Why would they? The homeowners still have time to
cure the loan and make up the back payments.
It does not matter what type of house or condition it's in, all mortgages can be
discounted. The best properties to perform a short sale on are the houses that
need lots of work and repairs because lenders will give you a bigger discount if
they see they are "don't wanters". Properties that are over leveraged are also
prime candidates. Most rookie investors who see a house over leveraged with an
upside-down mortgage may think there is no hope for this property. On the other
hand, this is a sweet deal to the savvy investor. Properties with large 2nd
mortgages are also treated as gold because the 2nd mortgage is wiped out at the
foreclosure auction. Lenders with a 2nd and 3rd mortgage position would rather
have something than nothing.
How Short Sales work:
Short Sales are one of the most effective techniques for discounting loans in
real estate. Short sales create huge investment opportunities and are a must if
you want to be competitive in this market. One of the most important steps in
the short sales process is getting the deed. Why do we want to get the deed from
the homeowner(s)? Because all too often, homeowners change their minds, or want
to back out of deals because they are scared, or they want to re-negotiate.
Without the deed, they can back out of the potential short sale even after you
have spent hours working on their property. When the homeowner signs the deed
over to you, now you control the property and you can go to work by calling the
There is a certain process for calling the bank when your doing short sales.
Banks can usually tell if you've never done this before. When you call the bank,
you never want to tell them you are an investor. This one of the biggest
mistakes rookies make and will almost always result in the lender not accepting
short sales. Therefore, when you call the lender to request the short sales
packet, you can either tell them you are the buyer or you represent the
homeowner. Sometimes they may ask if you are a real estate attorney. Just
restate what you told them before. Then you'll want to request the "short sales
packet" or "workout packet". When the packet arrives it will explain exactly
what you need to make this short sales deal successful.
The lender will usually request a hardship letter. A hardship letter is telling
the lender why the homeowners are not making their mortgage payments. Sometimes
they will request bank statement, pay stubs, income statements, and so on. Be
prepared to send them everything they ask for because if you don't it will not
be accepted. They will almost always ask for a HUD-1 and a real estate purchase
and sales agreement. Do not waste any time! Send everything the lender asks for
as soon as possible. It usually takes 3 to 4 weeks to get an answer back from
the lender, so you can't afford to wait. If the auction is approaching, you can
ask to extend the auction which in most cases they will, if they know it is a
Next in the short sales process is the BPO. This stands for Brokers Price
Opinion. Basically a real estate agent will come out and give their opinion on
what the house is worth. The key to short sales is the BPO. You want to try
everything you can to influence the BPO to come in as low as you can. The lower
the better. It takes a few times to get good at this, but once you do, I
guarantee you will try to get short sales on every real estate foreclosure you
encounter. You will also receive larger profits when you invest in a more
expensive home. This is because you are able to get bigger discounts from the
lender on properties over $500,000. The great thing about this is that it will
cost you about the same no matter what the property is worth.
In real estate, a short sale is a sale that happens when the outstanding loan
against a property is greater than the market value of the property itself. A
short sale represents a solution for a homeowner who cannot pay his mortgage and
wants to walk away from the property without blemishing his credit and financial
profile through a foreclosure or bankruptcy declaration. Not all banks will
consider the short sale, but many will. You will need a willing lender/bank and
buyer to complete a short sale.
The short sale deal can be a creative way to save your credit and avoid
declaring bankruptcy. Be sure you talk to a lawyer, a competent lender, as well
as an accountant to verify the details of short selling with particular
reference to your situation.
About Short Sale
Value. Confirm the value of the property by having a real estate agent perform a
Comparative Market Analysis (CMA). Costs associated with sale of property.
Figure out what you will spend on selling the property. Total up advertising
costs, any broker fees/commissions you may incur, as well as the closing costs
for the deal. Ask your mortgage broker about the fees associated with closing.
Be sure to include any legal fees in your calculations. Total loan value. Total
up all loans against the property. Do the math. Subtract the total amount of
money owed against the property from the expected earnings of the sale. The
number remaining represents the "short" of the short sale. The lender will
factor this number into consideration when deciding whether or not a short sale
is appropriate. Legal assistance. You may want to consider hiring a lawyer or
having a family friend who is in the legal profession assist you with the deal.
This article can give you a general idea about the short sale, but cannot
substitute for legal advice. Accountant. It is a good idea to get an
accountant's input on the short sale before you proceed. There are tax
implications in the short sale, just as in any real estate transaction. You need
to know exactly what you will owe before getting into a short sale scenario.
Find a buyer. In order to do a short sale, you'll need to come up with a buyer
to pay off the amount of money your lender will accept. The new buyer will not
assume your mortgage, rather, the sale of the property will result in you paying
off the mortgage directly and the buyer having his own new mortgage on the
property. Contact lenders. It is now time to get a lender involved with the
deal. Indicate to him that you are interested in a short sale, and share the
information on your specific property with him. Depending on what percent of the
estimated value you offer the bank, the lender may accept your deal or not. It
can be difficult to find a lender with the authority to accept a discounted
amount for the loan payoff, so do not think the first broker you call will jump
on the case. Proving insolvency. You must prove that you are incapable of paying
off the entire mortgage and/or staying current with payments month to month. The
lender will perform another mortgage application process to discover if you are,
in fact, incapable of the financial responsibility you agreed to when you got
the original mortgage. If the root of your financial woes occurred before you
received your first mortgage, the lender may have a case against you for
fraud-so beware. Also, know that lenders will almost never do short sales for
properties with second mortgages since the lender in the second mortgage will
not be happy about forfeiting his investment. Sell the property. Once your
lender has okayed the deal, and you have a buyer, you are free to sell the
property. The lender will want to see a contract between the seller and the
buyer indicating that the sales price is the exact amount of payment that the
bank will be receiving from the seller. The bank wants to be sure that you (the
seller) are not pocketing extra money off the deal. Benefits for the lender.
Lenders and banks routinely put properties into foreclosure in order to get
their money back in a situation where the borrower defaults. A short sale may be
an attractive alternative to the lender in some cases. In a short sale, the
lender does not have to deal with some of the unpleasantries of a foreclosure,
including the eviction process, attorney's fees, costs associated with the
resale of the property, damage to the property, and all the delays that are
likely to occur in the process. Even though the bank is getting less money, they
are getting it "now." Benefits for the buyer. The buyer gets a property at a
discount. Benefits for the seller. The benefit to the seller is that he walks
away from the deal without having to declare bankruptcy or having to go into
foreclosure. His credit report will be unaffected by this deal as well.
Short Sale Option Explained
The so-called "short sale" of a home can be a viable alternative to foreclosure
and will become more prevalent as millions of adjustable-rate mortgages reset
over the next 18 months.
Short sales are an agreement between the lender and the property owner that
allows a home to be sold for less than the amount owed. The lender makes the
final decision in approving a short sale. Potential buyers need to understand a
short-sale transaction before entering any purchase contract. While a buyer and
seller may agree on the price, it's up to the lender to accept that price or
not. It's a potential option based on the value of the property, the underlying
fundamentals of what is owed and the anticipated marketing time. The lender has
predetermined guidelines for the minimum amount they will take in the loan sale.
When the sale proceeds do not satisfy the remaining balance, the after-sale
balance is forgiven. The credit is then reported as satisfied for "less than
Though short sales have been around for a long time, they have come to
prominence lately because of the unprecedented increase in foreclosures. While
short sales are by no means a slam dunk, lenders are more willing to negotiate
with borrowers today who are in default on their mortgage payments. Indicators
show that in many areas, many of the short sales are investor-owned. What the
lender wants upfront is a hardship letter from the seller, a contract between a
buyer and seller and an estimated settlement statement. The lender may
counteroffer and you continue to negotiate. Remember, the last thing a lender
wants to do is foreclose on a home. If a lender puts the house in foreclosure,
it has to clean it up, paint it, replace the carpet, list it on the market, pay
a broker's commission and other closing costs as well as maintain the property
while it sits waiting for a buyer.
Many lenders are not prepared and not accustomed to short sales and that can be
a challenge for real estate agents and their clients. Realtors need to build a
relationship with the bank on a short sale, when possible, they should meet with
the loan officer and provide them with as much data as possible on the house and
the market. A short sale can benefit everyone involved in the transaction;
financially troubled homeowners save the embarrassment and marred credit
associated with a foreclosure. Investors and entry-level buyers have the
opportunity to buy a home below market value. Lenders avoid the hassle and
expense of seizing a home and putting it up for auction.
Short sales can occur before a home goes to foreclosure or during the
foreclosure process. Remember, lenders are not looking to bail out borrowers who
simply overextended themselves during the recent real estate boom. In most
cases, a lender will only consider a short sale if a borrower has clearly
suffered a serious financial hardship that directly caused him or her to default
on the mortgage. Short sales are a common practice within the mortgage industry
and are determined on a case-by-case basis. While banks still realize large
losses on short sales, there are some benefits, including the elimination of
foreclosure attorney fees and costs, the marketing costs should the property go
to REO and any potential risk of damage or deterioration due to prolonged
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