What is a Short Sale?

We get this question all the time. Let’s keep this simple. You’ve no doubt heard about short sales in real estate, but what is a short sale and why do I need to know?

A short sale is a real estate transaction where the seller of the home owes more money on their home than a buyer is willing to pay (market value). A lot of homeowners (also referred to as borrowers) in Orange County who bought their homes between 2003 and 2008 owe more on their home than it is worth. Despite owing too much on their home, some owners still need to move or run into financial hardships that prevent them from being able to afford their home. See if you qualify

In this situation, a homeowner has a few options.

Loan Modification – if you qualify, you can refinance your loan. About 10% of homeowners qualify for a loan modification.
Short Sale – You can sell your home and the bank will forgive the negative balance. Usually, credit is negatively affected, however not nearly as severe as a foreclosure. California law allows the debt forgiven to not be taxable (expires October of 2012). Please consult with a tax expert to determine if this is a good choice for you. You may be able to purchase a home within 3 years.
Foreclosure – You can give the home back to the bank. A foreclosure is usually a last option for a homeowner. If a loan modification or short sale doesn’t work out, a foreclosure is usually the outcome. A bank still may be able to come after you for the unpaid balance of the loan depending on the type of loan they have. Your credit will be severely impacted and you may not be able to purchase a home for up to 7 years.

It’s actually in the bank’s best interest to do a loan modification or short sale on the home. Instead of foreclosing on the homeowner, most lenders will allow a home owner to sell thier home and forgive the negative balance due on the home. When a bank forecloses on a homeowner, the bank loses an estimated 70% due to the costs associated with taking the home back, getting it ready for sale, and selling the home. A short sale costs the bank about 40% and they typically lose 20% on a loan modification. Why don’t they push the loan modification then? Because most homeowners that are in trouble don’t qualify for a loan modification. It’s estimated that only about 10% of homeowners qualify for a loan modification right now. This may change in 2012, as the government is rolling out a new plan to help homeowners refinance their homes if they’re in trouble and we’ll see how this plan turns out.

The Short Sale Process

The process for a short sale is pretty straight forward. The biggest thing to remember is that the bank needs to approve the short sale. The process can range from 1 month to a year for approval. We want the 1 month approval!

First, you need to determine whether you qualify for a short sale. Yes, the banks actually have guidelines, however most homeowners qualify. Next, there’s some paperwork that needs to be filled out and your home needs to be placed on the market for sale. During this time, your agent will contact your lender and let them know about the sale and negotiate with the bank how much they’ll accept for the home, usually very close to market value.

Short sale listings need to be marketed like any other home. Anyone that tells you otherwise doesn’t have your best interest at heart. The home needs to have high quality photos, be clean and ready for showings, listed in the MLS and be available for showings, and be marketed on the web as well. The goal is to sell the home to a highly qualified buyer that wants the home. The bank will approve and process these sales much more quickly.