What is a Short Sale, and are they Good “Deals”?

July 1, 2020

What is a Short Sale, and are they Good “Deals”?

Today I want to give you some information about short sales. The topic has been coming up more recently, and I’ve had a lot of questions about it. So we’ll dive into a summary and then I’ll give you some information in more detail down the road.
So the first question, “what is a short sale?” A short sale is a situation where a homeowner has a financial hardship and they need to sell the property because they can’t afford it. They owe more than the property will sell for on the open market. Let’s say they owe $700,000, and the property is only worth $600,000. That means they’re $100,000 short, and then when you add in any selling costs, commissions, everything else, they’re even more behind. What those owners have to do is present a financial package to the bank, saying here’s our hardship, here’s the proof of our hardship, here’s what’s happened, and we’re asking you, our bank, to be shorted at closing. That’s where the term “short sale” came from. Basically the bank looks at the financial hardship and says, this is legitimate, it’s valid, it makes sense to us, and yes, we’re willing to accept. Assume the proceeds from the sale is only $565,000 instead of the $700,000 that the bank is owed. They’ve agreed to be “shorted” $135,000.
In the past, Short Sales were a big deal in the market downturn. However, for the last eight years there have been very, very few. I’m not sure how many of them we’re going to see come up because so many owners do have some amount of equity. Either they bought at the bottom of the market and they built equity over years, or because of new lending practices, they’ve had to put something down on the property. I done believe we’re really going to see a lot of these in our current real estate market
The next question is, “can we get a great deal on a short sale?” Not necessarily. What I expect is that most of the short sale properties are going to make it onto our local Multiple Listing Service (MLS), so they’re going to be put in front of the open market. Right now buyers are very informed and they’re very motivated. There are not a lot of properties available. If a short sale property is listed for a fair market it will sell for fair market value. For example, a home should normally sell for $500,000, but maybe they listed as a Short Sale for $450,000. That listing will end up in a bidding war and it will get bid up to $500,000 because that is the fair market value of property. So to answer those questions, I’m not sure that we’re going to see a lot of them coming up, and they’re not going to be these AMAZING deals in comparison to the rest of the market. That is a quick summary of Short Sales for right now.
If you are a Homeowner in a situation where you need some financial advice, or you need to figure out if a short sale is an option, please contact us. We were involved in lot short sales during the market downturn. The Quantum team is very familiar with the process. We can speak confidentially about it and help you decide if it’s the right option or not.
The other question that I get asked is, “is a short sale better than a foreclosure?” That answer totally depends on each situation. I am not a credit repair specialist, and I’m not a credit score specialist. There are a couple points to be aware of when considering a short sale.
First, how long are you going to be behind on payments. If you do a quick foreclosure and you know you can sell the property within six to nine months, is it better to only have six to nine months of missed/late payments, versus a short sale that can take up to 18 months. Is 18 months’ worth of late payments going to hurt your credit score more than a 6 month foreclosure?
The second point is the actual event, the short sale event versus the foreclosure event. I’ve been told in the past that the foreclosures DO impact your credit score for a larger amount of points versus a short sale. So maybe there is a benefit there to do a short sale.
Third, a lot of lenders are more open to lending or letting a buyer apply for a new loan sooner with a short sale than with a foreclosure. So that is a consideration as well. If you plan on getting your financial house in order and maybe buying again within two years, then a short sale may be the better route even though it does take more effort. Sellers and real estate agents have to put the package together and they have to be involved through each step of the process. As I said, feel free reach out. I’d be glad to answer any questions. We can speak confidentially and it doesn’t mean you have to do anything at all, but at least you can be more informed and be able to make the right decision.


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