Interesting dynamics of short sales

Dynamics of short saleIt is very important to understand that a short sale is always the better option if someone is facing foreclosure. A short sale will not do as much damage to your credit as a foreclosure, which helps someone to recover by moving on with their financial future faster. There are absolutely no advantages to short sales when comparing them to the foreclosure process.

When shopping for a home it has been noticed that certain listings are labeled as short sales, short pays or pre-foreclosures. All of these terms mean the same thing, which is that the seller is upside down on his or her mortgage and is attempting to negotiate a deal with the lender in the hope of avoiding foreclosure. The transaction benefits the bank by allowing it to avoid recovering the home in foreclosure, which is expensive and time-consuming and it benefits the seller by allowing him or her to avoid the negative credit consequences of foreclosure.

Buying a short sale property is just like a traditional purchase. However, there are a couple of ways in which the purchase agreements you and your agent draw up are different. The contract will specify that the terms are subjects to the mortgage lender’s approval. In a normal transaction, the only party who would need to approve the sale is the seller. Some of the major dynamics of short sales are here;

Short Sales vs. Foreclosures:-

One of the biggest differences between buying a short sale and buying foreclosures is the presence of the homeowner in the transaction. With foreclosure transactions, the bank has taken the house back from the owner and will typically market the house “as is” which is usually in some sort of distressed condition especially if the house has sat vacant for any amount of time. However, in a short sale transaction, the owner is often times still living in the property. This gives an investor a tremendous advantage in assessing a property as compared to buying a distressed foreclosure. For instance, if the property is occupied, the furnace or air conditioning system is probably working and this can be one of the biggest expenses associated with outcomes.  In addition, a house that is currently being inhabited will likely have functioning electrical and plumbing systems. Again, where this may be a mystery with a distressed foreclosure, the interaction with the homeowner during the short sale will typically enable the investor to fully assess the property before the purchase.

Negotiating Short Sales:-

Another interesting dynamic with short sale transactions is the ability to negotiate with the homeowner.  Understand that most homeowners in that situation are very motivated to structure a short sale as the impact on their credit is much less than a foreclosure as well as a possible deficiency judgment associated with a foreclosure.  As a result, there is opportunity to ask for a little more from the homeowner than you could with a foreclosure. For example, we are closing on a short sale tomorrow where we specifically outlined in the contract that we wanted the homeowner to leave the appliances as well as their washer and dryer.  Not surprisingly, the sellers agreed to this as they were highly motivated to make this transaction work.  This will save us over $1,000 on the cost of new appliances as well as another $400 from selling the washer and dryer.

Short Sale Tips:-

  • Always document in the contract exactly what you want from the sellers. In this particular instance, the selling agent tried to assure us that the sellers would leave these items for us, but luckily we were insistent that they sign our appendix specifically outlining our request.
  • It is always a good idea to check the condition of the property either the day before or the day of a closing. This is true for just about any real estate transaction, but especially foreclosures and short sales. You never know if the condition of the property has been materially altered in any way unless you view it for yourself before the closing.

Buyer advantages:-

In a Short Sale, the buyer truly benefits from buying a short sale property because they are receiving the home for much less than the property is worth. Buying a short sale home could save a purchaser up to 40% in some cases because the house is listed significantly below actual value. This is a huge incentive for house hunters.

Seller advantages:-

 A short sale benefits the home owner because it guarantees that the house will not go into foreclosure. This also means the seller’s credit score will not be affected as harshly as it would if a foreclosure took place and the credit score will not be affected as long. By selling short, the seller can move on with their lives by getting back on their feet quicker and having a better financial future ahead. Instead of dealing with the pitfalls of foreclosure, they will have a better chance of owning a home much quicker.