Short Sales

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About Short Sales

In general terms, a short sale is a negotiated process through which a bank or other interest holder forgives a portion of the amount owed on a home in exchange for the homeowner's full cooperation in securing a buyer for the property. The amount forgiven can vary, but is typically the difference between what is owed (the remaining balance on your mortgage loan or loans) and the proceeds from the sale of the home. Short sales typically occur in down markets when the homeowner may owe more against the home than it is worth.
You might consider selling your home short when you can no longer afford the payments due to financial hardship (such as job loss, death of a household income earner, sudden, unavoidable expenses, like appointment as the long-term care provider of a dependent relative, etc.) or if you are forced to leave the area due to circumstances beyond your control (like court-ordered moves, military deployment, etc.). The main benefit of a short sale is that it will normally have less of a negative effect on your credit than allowing the home to go into foreclosure. In addition, you will not typically continue to make mortgage payments during the negotiating process, allowing you time to save money for things like moving costs, rental deposits, etc. Also, in most cases, you will continue to occupy the home until it is sold, which means no eviction.
Banks consider short sales for a number of reasons. Probably the most common reason is the significant financial risk a bank faces in a declining real estate market. The foreclosure process can take anywhere from six months to a year or more, which directly translates into dollars lost for the bank. In a really bad market, a bank could risk losing a significant amount of money in the following ways :
  1. Equity risk - As the market continues to decline, the percentage of the amount owed against the home the bank will likely be able to recoup will continue to fall until the bank has clear title and the property is vacated so that it can be sold.
  2. Ownership risk - Banks do not want to own homes because homeowners must pay the costs of upkeep on those homes, like repairs, maintenance, utilities, yard service, etc.
  3. Transition costs - When banks take possession of properties, they are often met with surprises. The previous homeowners sometimes destroy the home, steal appliances, trash the landscaping, etc., out of frustration and anger at the prospect of losing their homes. In addition, foreclosure properties frequently contain a significant amount of garbage and/or personal property left behind by the prior owners. The bank must pay to have these items fixed/removed before it can sell the home. Transition costs can be significant, in the thousands to tens of thousands of dollars.
  4. Legal costs - Foreclosure often involves evicting a homeowner who does not want to leave. The costs to file the necessary legal documentation and to litigate as necessary can be daunting. In addition, many cities have begun to fine banks that do not adequately maintain their foreclosure properties while they are being sold.
Taken together, these risks that are inherent to the foreclosure process can translate into enormous financial losses to the bank. In a short sale, however, the bank has the full cooperation of the homeowner in selling the property, which bypasses most of the transition and legal costs. In addition, the homeowner will typically continue to pay utilities, maintenance costs, etc., until the transaction is complete, allowing the bank to avoid most of the ownership costs as well. Because a short sale typically takes half the time of a foreclosure or less, banks are also able to avoid much of the equity risk by allowing a home to be sold short.
All in all, banks stand a better chance of mitigating financial risk by agreeing to negotiate short sales in lieu of foreclosure. If the potential costs of foreclosure exceed the amount the bank would have to forgive in order to sell a home short, chances are good that the bank will seriously consider a short sale. Whether a particular bank will agree to allow a particular property to be sold short is a decision only the bank can make after carefully assessing the pros and cons. An experienced short sale negotiator can help you highlight the pros and minimize the cons, increasing the probability that the bank will agree to the deal.
If you owe more than your home is worth and can no longer afford to make the payments, selling your home short could be the solution to your problem. Even if you are already one or more months delinquent in your payment, it may not be too late to avoid foreclosure. If you think you may need to sell your home short,contact Dulce Ridder today to arrange for a free short sale consultation. Losing your home is never easy, but Dulce can help minimize the pain and the damage to your credit, as well.