Occasionally, buyers or sellers ask about a short sale. A term heard more often during the Great Recession when homeowners found themselves needing to sell homes they could no longer afford, it still comes up now and again. A short sale can be a very effective tool for sellers who do not want to go through foreclosure but need to sell. It can also be an opportunity for buyers looking for a less expensive home. However, neither of these situations is quite as simple as they might seem at first glance, so let’s take a closer look.
What is a short sale?
A short sale is when a home is sold for less than the amount due to the lender after all of the costs of the sale are paid. A home can be underwater (meaning that a homeowner owes more on the mortgage than their home is actually worth) for a short sale to occur, but it can also occur as a result of divorce, a death in the family, or a medical emergency. A short sale can also occur if there are two mortgages. The sale price might be enough to pay off the first mortgage but not enough to completely pay off the second one.
What are the benefits of a short sale for the seller?
There can be a number of benefits of a short sale for sellers, although a seller should take a good look at all the options available to them including foreclosure. A short sale is not an ideal solution, but it can be something of a lifeline in a difficult situation.
Less Credit Score Damage
A short sale does far less damage to a seller’s credit score than a foreclosure. Credit score firms frown upon the foreclosure and will dole out a much lower score than if a seller opts for a short sale. The benefit to the seller is that for future financial endeavours, including the possible purchase of another home, the seller is in a much better position.
Less Emotional Trauma
Undoubtedly, if a seller is in a situation where they feel they must choose a short sale, there is a fair amount of stress. For many people, purchasing a home is the largest financial transaction they will ever have, so being able to say that the home was sold often allows people to move on from this experience.
What are the negatives of a short sale for a seller?
No profit from the sale of the house.
In a short sale, sellers don’t receive any of the money from the sale. It all goes directly to the bank and gets applied to the outstanding balance of the mortgage and closing costs.
It all depends on the bank.
Home sellers need permission from the bank in order to proceed with a short sale. Unlike a typical home sale, a seller is not able to negotiate with the buyer. The seller’s agent takes the offer to the bank, and the bank then decides if the offer will work or not. The bank is not obligated to approve a short sale. They will only do so if they feel that it works to their advantage.
A bank may decide that a short sale works for them if they will make more money through it than a foreclosure. This, of course, depends on the individual bank and its investors. The bank is aiming to recover as much of their investment as possible, and a short sale is estimated to save them 25- to 30-percent on foreclosure costs. However, occasionally it also turns out that the opposite is true depending on investor guidelines. In that case, the bank will prefer foreclosure.
Less cash for a future home purchase.
Because the bank takes all proceeds from a short sale, the seller will not have funds from this sale to put toward a new home. This means that if the seller decides to purchase a home in the future, they will be starting the financial process from the very beginning.
What is needed for a short sale?
There are different kinds of short sales, but in general, a short sale requires a home where the seller is experiencing a hardship and there isn’t enough equity in the home to pay off the mortgage after paying the costs of the sale. The bank also needs to be willing to do a short sale, and there needs to be a buyer willing to purchase the home. A seller also needs an agent with experience in short sales.
What does an agent do in a short sale?
As always, it is best to find an agent with experience in this kind of situation. The benefit is that an experienced agent will have learned from previous situations and be able to help the seller through what can be a lengthy process.
The agent determines the type of short sale.
There are any number of types of short sales and determining which one is right for the seller’s particular situation is key to getting the process started down the right path.
The agent gathers the necessary paperwork and submits it to the bank.
Each bank has slightly different requirements for this part of the process, and the agent will help figure out what is needed. Generally, though, the package will include:
- a letter of authorization that lets the agent speak with the bank on behalf of the seller
- a preliminary closing statement
- a completed financial statement
- a hardship letter from the seller
- two years of tax returns
- two years of W-2 forms
- 30 days of payroll stubs
- two months of bank statements
- a comparative market analysis or list of recent comparable sales in the area
The agent helps the seller price the short sale home.
This is where experience comes in handy. The sale price needs to be attractive to potential buyers, so it should be low; however, it also needs to be high enough to satisfy the bank’s broker price opinion (BPO). A bank will ask a broker, often a real estate agent, to find three properties that have recently sold and are similar to the one in question. Based on this information, the broker comes up with a range of values and then adjusts that number up or down based on any differences in the properties. The resulting number is an opinion of value and is the number the bank will use for their calculations.
The agent puts the home on the market.
A short sale home will be marketed just like any other, and the agent will share all resulting offers received with the seller in order to discuss their merits. In Ohio, the listing must state that it is a short sale.
The agent negotiates the short sale.
Once there is an accepted offer, the agent will send the above package to the bank along with the following:
- the listing agreement
- the executed purchase offer
- the buyer’s preapproval letter
- a copy of the earnest money check
- proof of funds
The agent gives the short sale approval letter to the seller.
Most sellers want a letter that releases them from all liability and contains no deficiencies, but that all depends on the state where the sale occurs and the lender in question.
Have more questions? Don’t hesitate to get in touch. Taylor Kolon, Cole Metcalf, Galen Buchanan, and Victoria Watson are happy to help you handle whatever situation arises as you find your new home.