Pros and Cons of the Short Sale Process

Pros and Cons of the Short Sale Process


Short sale process tips you must know as a buyer and from the point of view as a seller on a property in default or in foreclosure.

As a Buyer

Buying a short sale property is a great opportunity to purchase a home at a discounted value. Understanding the process from both aspects of the transaction – buying and selling – will allow you to make a purchase you are confident in.

A short sale is a sale that takes place when a lender allows a home owner to sell their house for less than what is owed on the mortgage. For a buyer this presents the following benefits:

  • Buyers can purchase more house for the money they wish to use. If you have allotted yourself a specific amount of money for a mortgage, you can negotiate on a larger home for this price.

  • You are purchasing a home that is currently lived in. Many times when a home has been foreclosed upon, it falls into disrepair and causes the new owners a lot of financial hardship from trying to repair the property.

  • You are working directly with the home owner and many deals can be struck.

Of course, as with any deal there may be a few disadvantages to this process.

  • You may need to employ a real estate attorney to finalize the deal. Some lenders will require this action, while others will not.

  • Negotiations with the lender may take longer than a regular transaction and may delay any plans you have for moving quickly.

  • Certain items, such as a home warranty, home inspection, pest control or termite inspection or appraisal may not be included in the final offer price. You may be required to prepay for these services or pay at time of loan closing.

As a Seller

It is important to understand the short sale process from the point of view of the seller, as it also has many advantages and disadvantages. The short sale process should begin before the seller even offers the property up for sale to ensure a quick and smooth transaction.

Selling the home as a short sale will allow the seller to avoid foreclosure on the property and, perhaps, bankruptcy. However the process does take the approval of the lender and some lenders may not allow this type of sale.

To begin the process the seller will need to do the following:

  • Contact the lender and locate the person in charge of authorizing short sales. As a way to discourage this practice, many companies make this department hard to reach. Several phone calls may be necessary before the contact is made.

  • If the lender agrees to allow the seller to sell the home in a short sale, then the seller must send a Letter of Authorization. This is very important because the lender will be reluctant to share any of the information with an outside source. Real state lawyers, brokers or even the buyer will need to interact with the lender. Without this letter the lender will delay the process.

  • Submiting a Letter of hardship. This is the most crucial part to the process. The seller must submit in writing why they can no longer afford the home mortgage and why it is necessary to sell it fast. The more pathetic (but honest) the story is, the better. The seller will have to prove financial difficulties by attaching financial statements, proof of loss of income, portfolio failures, or terms of layoff. If the home’s value has not risen or dropped significantly they should also include proof of other listings in the area showing the significant decrease in value of property as a reason they cannot receive full price on the sale. The seller really needs to make a case to their lender so that they will accept the opportunity to sell quickly.

When the seller receives an offer on the home they must immediately send it to their lender. At that point the lender will begin negotiations with the potential buyer. This process can go either fast or slow, depending on the conditions of both parties buying and selling the home.

Upon approval the seller will be able to sell the home for the reduced amount. Sellers should also take note that in a recourse mortgage state lenders may be able to sue the initial borrower for the remaining amount due. Also, as part of the Debt Forgiveness Act of 2007, the difference in the mortgage and the sale amount may be considered as taxable income to the seller. AConsult an attorney for proper legal advice in these matters and if there are any new rules and regulations to be factored.

Good luck with your transaction and hope the above provides insight into the short sale process.

Take an organized approach to help simplify the process to purchase a Short sale foreclosure house, use the checklist at this location: Click to get the Home Buyers Checklist Download PDF

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