Wednesday, November 28, 2007

Short Sale - 8 Common Questions

If you are a homeowner (considering doing a short sale), be sure to find a REALTOR in your area who is knowledgeable and has experience doing them. If you are a REALTOR, you should strongly consider adding short sales to your repertoire.

Here are some of the top questions clients have asked about short sales.

1. What is a Short Sale?

In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually 'forgives' all or a large portion of the difference.

2. Who benefits from the Short Sale?

Short sales are a win-win situation. Lenders, Homeowners and REALTORS all benefit from the successful short sale. Mortgagors get the majority of their money back, Homeowners get the relief they need and are able to sell their property and avoid foreclosure, and REALTORS can facilitate the transaction and receive compensation (commission) from the sale of the property.

3. Why would banks forgive the difference?

To mitigate their losses, banks can accept a settlement of less than what is owed on the property. When faced with the option of getting the property 'back' through foreclosure, a short sale often makes a much wiser business decision for the bank.

4. This sounds too good to be true!?

Not really. Things that are 'too good to be true' usually don't make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

5. Can FHA, Conventional or VA loans receive a short sale?

Yes! I have successfully negotiated short sales for each of these loan types.

6. What is Negative Equity?

Also known as being "upside down" negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.

Even if a person owes exactly what their home is worth they would still be considered 'upside down' since there are no resulting proceeds to pay the fees associated with selling the property (REALTOR fees, taxes, title, and other seller closing costs).

7. Why does my property have negative equity? Here are a few common reasons:

  • Person bought at the height of the market and the market has now declined or they paid more than the property was worth.
  • The area has become less desirable for any number of reasons, so property values have declined.
  • Person purchased the home with little or no money down and wants to sell within a few years of purchase... and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing.
  • Person refinanced the home (with a high appraisal value) and now has little or no equity.
  • Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value.
  • The market is soft because there is too much builder inventory (new homes) or too many existing homes on the market (resulting in a buyer's market).

8. How long does a short sale take?

Short sale approval can take 45-60 days, with some lenders taking 90 days or more. During that time, all foreclosure activity, if any is typically placed on hold.

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