A short sale in real estate occurs when the property sells for less than the amount the seller owes on the property. Recent drops in overall property values have resulted in many lenders accepting short sales to avoid foreclosure. A short sale can provide significant advantages to both buyer and seller, but there are also factors that require caution.
The lender is the most important member of the transaction. Because the lender has to agree to accept less than he is owed on the property, the decision to accept a short sale offer is at the lender’s discretion. That permission is not automatic, so the seller will have to determine the lender’s requirements and meet them promptly and accurately.
Most short sales originate with the seller. At the point where the seller realizes he can no longer afford the mortgage payment, he can choose between a short sale and foreclosure. He may begin by trying to list the home at a price sufficient to pay it off. An experienced Realtor will see a problem if comparable sales (comps) in the area have sold for considerably less, and can help convince the lender to consider a short sale by presenting that information to the lender.
Another factor is why the seller is facing foreclosure. Lenders will look more favorably on sellers with financial problems that aren’t wholly their “fault”, like divorce, accident, illness, or layoff. The seller may have to write a letter to the lender outlining the personal circumstances that led to the problem.
Sellers can request that the short sale not be reported on their credit, but again, this is at the discretion of the lender, and the request may or may not be granted. The short sale may also have tax consequences to the seller, so be sure to consult a tax professional.
Short sales are popular with buyers—everybody loves a deal! But the short sale may not be such a good deal if the buyer fails to perform his due diligence. Because many common inspections are at seller’s expense, they are often eliminated in the short sale. The buyer should assume the expense, and make the offer contingent upon satisfactory inspections. The buyer should also look closely for deferred maintenance—the seller may have let some things slide as their finances declined. A thorough title search for any liens against the property is essential for the same reason.
A short sale can turn a problem situation into a great solution for all parties. Following a few simple guidelines can keep it from becoming a bigger problem.
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