Saturday, 22 November 2003

Short Sales And Related Issues

Short sales have grown to become more prevalent simply due to the fact we have been in a recovering economy. They happen when a homeowner cannot maintain keep the mortgage current along with other financial issues. To minimize potential losses, the financial institution may agree to permit him/her to sell the house for the current FMV even though that may be less the balance of the mortgage. If the lender does agree to the course of action, the alternative for the lender to seek a foreclosure which takes both time and money. With this type of sale, the bank shortens the time to resolve this matter and, potentially, maximize its net proceeds.

Since the buyer (usually a house flipper) will be buying the property at its current fair market value and, usually in a weakened real estate market, they will probably be paying less in a short sale than they would if the current owner listed the house at a price sufficient to pay off the full balance of the mortgage. In exchange for the lender agreeing to this course of action, there are usually a few drawbacks for the homeowner to understand and agree to.

To do this type of transaction, the homeowner must demonstrate that he/she is in financial distress. And, when this occurs, the homeowner is also likely not to have the funds to maintain the home in good condition as well. So, when the buyer purchases a short sale home, neither the property lender nor the homeowner will typically have made the necessary repairs to maintain the home. The buyer will get the house as-is, complete with any physical problems the homeowner was unable to fix. Hence, even if the property is purchased at a discounted price, the buyer will probably have to invest funds to make certain necessary repairs.

To complete a short sale, both the lender and the homeowner/borrower must agree to any short sale offer. The lender must accept less for its collateral than the balance of the mortgage and some lenders may require the homeowner to be financially liable for the difference between the sales price and the mortgage balance. If the homeowner doesn't agree to this negotiated point, the lender may not agree to proceed with the sale. However, lenders may forgive the difference and write it off which gives the homeowner some incentive to agree to the short sale.

Short sales usually take longer to close than traditional sales. The lender will probably want to have the home appraised by a certified appraiser and it will also take time to consider the ramifications of the proposed sale. It might amend or outright reject the offer. It's possible for a short sale to continue unresolved for months. And, a second lender adds even more complexity. If this is the case, then all lenders must agree to the short sale.

The law surrounding short sales is complicated and the facts of each situation are unique. It is recommended that a homeowner start this process by engaging a good real estate attorney and local and experienced real estate agent. They will guide you through this difficult course of action.

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