What to Know About Short Sales

Personal financial difficulties that result in missed mortgage payments are serious, leading to loan default and possible home foreclosure. Working with a lender to accept a short sale, an amount that is less than the actual mortgage balance, can be a way out of an unpleasant situation, but there are things to know before exploring and proceeding down that path.

First, it may be advantageous to investigate other possible options. A short sale is not always the best way to move forward, even if the lender seems willing. Negotiation can be complicated and time-consuming for both the seller and for potential buyers. In addition, it is rare that a short sale will leave a seller completely free of all obligations related to the home. The short sale might leave a seller still liable for the unpaid mortgage loan balance, and can result in a judgment against the owner(s). If the debt is forgiven, a borrower can sometimes still have a financial liability; a forgiven debt is often counted as income for tax purposes

Finally, even though a short sale is not as detrimental as a foreclosure, it is still a blemish on a credit rating.

For informational purposes only. Always consult with an attorney or financial advisor before proceeding with any real estate transaction.

Sellers Must Weigh Pro and Cons of a Short Sale

The best action, when faced with a looming financial burden, is to consult with the bank or mortgage company as early as possible. Explain the situation, and ask for advice. Possible workouts, for a homeowner who has a previously unblemished credit history and record of making payments on time, might include:

• A 60 or 90-day suspension of regular payment;
• Adding the unpaid principal and interest to the end of the loan;
• Reducing the amount of the payment for a specified period; or
• Refinancing to lower the monthly payment to a manageable amount.

While no single solution is right for everyone, and not all lenders will be amenable to making any concessions, it is certainly not beyond the realm of possibility and always worth a try. If a lender is unwilling to consider other options, a homeowner might consider the possibility of selling quickly for cash. A number of reputable firms now buy distressed properties, and, under the right circumstances, the prices paid can be quite attractive.

The worst thing is to do nothing. If there is an expectation of change in your future—a new job, perhaps, or a return to work after a period of disability—disclose the situation to your lender, and attempt to "buy some time."

Advice for Buyers Contemplating a Short Sale

Is a short sale always a bargain for the buyer? The short answer is, "It depends." Remember that lenders typically are averse to losing money. Even though banks and mortgage companies are not in the business of managing properties, the price a lender will accept is going to be as close to market value as possible. In addition, short sale properties may hot have the same rules as normal real estate listings.

Bank-owned properties do not require in-depth disclosures; additional research typically is required. If a property is headed towards foreclosure, buyers should determine independently if an older property has had foundation or roofing problems, water leaks or basement flooding, survey irregularities or a history of disputes with neighbors, or if there are other concerns. Check with local planning and zoning departments and always call for a property inspection, but don't expect a lender to make extensive concessions or repairs. If you're dealing with the property owner, be sure they have obtained bank approval for the short sale.

Short-sale negotiations are sometimes frustrating. Generally, a short sale must be approved not only by the seller, but by successive levels of lender management. Occasionally there are additional legal requirements. Qualification for a new loan is just as stringent as for any other property. Chaparral home buyers must pay not only the standard closing costs and transfer fees involved, but also possible back taxes and deferred maintenance, in addition to required repairs.

The best recommendation is to work with a professional real estate agent, know the market, weigh the pros and cons of price against the time and effort necessary, and set realistic budget limits. A lender has an option to accept, counter or reject any offer. In some cases, competition can drive the price of a short sale property above what is expected, occasionally even higher than market value.

Whether a short sale offers high potential return on a buyer's investment must always be evaluated in light of personal situation, location, timing, actual housing needs and budget.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.