By Sara & Chad Huebener
Short sales - we are hearing more and more about them, as well as foreclosures. What exactly is a short sale and how does this differ from foreclosure?
A short sale is the sale of real property where the value of the property is less than the outstanding mortgage and other liens against the property. The mortgagor (owner) must typically demonstrate financial hardship in order for the bank to accept a short sale, and often times, must have missed payments. The bank, through its loss mitigation department, agrees to accept less than the outstanding loan balance, and the seller must turn over the proceeds of the sale to the mortgage company at the time of closing.
The results of a short sale in terms of excusing a debt vary. In some cases, the bank will provide a satisfaction of mortgage and the owner will be debt free. If this is the scenario, the bank has the right to approve or decline the sale of the property. In cases where a satisfaction is not granted, the mortgagor (owner/seller) may be liable for the outstanding debt on the property.
Short sales are typically instigated by a homeowner in an effort to prevent a foreclosure, which has a longer lasting impact on the homeowner's credit score and ability to purchase a home in the future. If the homeowner has missed payments and the bank has issued a notice of foreclosure, the home will eventually offered for sale at a sherrif's sale. The homeowner has 6 months from the sheriff's sale to bring the delinquent loan current - these 6 months are known as the redemption period. During the redemption period, the homeowner may try to sell the home "short" to avoid having a foreclosure on his record.
The incentive for a bank to accept a short sale include the fact that short sales incur fewer costs than foreclosures, and are often faster to turn around in the long run. The challenge in our market in getting short sales accomplished include longer market times, which often exceed the redemption period of six months. Furthermore, banks have notoriously long turnaround times for offer acceptance - sometimes in excess of 6-8 weeks, so finding a buyer that is patient enough to tolerate the lengthy wait, and/or has the abilty to hold off moving while awaiting the bank's acceptance or decline of the offer, can be a challenge.
If a short sale can be accomplished successfully, the implications for the homeowner (seller) are more positive than if the seller is foreclosed upon. Once the seller is foreclosed upon, the bank retains ownership of the property and the resulting impact on the homeowner's credit is severely jeopardized. Many sellers believe that in a foreclosure scenario, they "walk away from" the house. In fact, in a foreclosure situation, the bank may hold the homeowner responsible for a portion of the debt in the form of a deficiency judgement. Many sellers do not understand that foreclosure is avoidable, but they must act before the expiration of the redemption period to successfully accomplish this endeavor.
Short sales have become a reality in our marketplace, and are not unique to any price bracket. Our goal is to make sure sellers understand the foreclosure is preventable. If we can prevent foreclosures, our ability to shorten the housing crisis is dramatically improved.