By Bruce Swedal
One of the hottest trends in bargain real estate buying is the short sale. This occurs when a home sells for less than the total amount owed on the mortgage and can be an alternative to foreclosure. This can provide a bargain for the buyer as well as an alternative solution for both the seller and the lender.
The most important member of the short sale transaction is the mortgage lender. The mortgage lender has to approve the short sale, and that permission is not automatic. The seller will need to research the lender’s requirements for approving a short sale and meet those conditions promptly.
Several factors may affect the lenders decision to approve a short sale. One factor is the number of foreclosures in the area. Lenders don’t want a large number of vacant foreclosure homes on the books. Besides the risk of vandalism and deterioration, a large number of REO (Real Estate Owned) properties look bad for bank management. Another influencing factor is the reason the seller is facing foreclosure.
The bank may look more favorably on circumstances that are not the “fault” of the homeowner, such as illness, layoff, or divorce. It may help for the homeowner to write a letter to the lender detailing the circumstances surrounding the financial problems. Some lenders are even willing to refrain from reporting the short sale on the seller’s credit report.
Sellers may start out by trying to list the home at a price that will pay the loan in full. An experienced Realtor may recognize that the price is too high and suggest the seller consider a short sale. The Realtor can also be instrumental in convincing the lender to approve a short sale by presenting information on comparable sales (comps) in the area.
Short sales are popular with buyers because of the bargain price. However, if prices in the area continue to fall that bargain may turn into a burden. Furthermore, a homeowner with financial problems may have deferred maintenance on the home that could lead to the need for expensive repairs.
Finally, many common inspection expenses are traditionally paid by the seller. In a short sale, the seller may not be willing or able to pay for inspections. Again, this can lead to considerable expense if a hidden problem arises after the sale.
The seller’s financial problems may also have resulted in liens placed upon the property, so title insurance is essential.
The approval process for the short sale may add several months to the closing process, so be prepared for delays.
A short sale can be an ideal solution for both buyers and sellers, as long as both sides know what to expect.
If either side of the transaction goes in with unrealistic expectations, the process can turn quite frustrating. Deadlines are often missed as the lender does not adhere to them. The lender will never respond to the offer as quickly as the parties would like. In cases where the buyer is under a timeline to move the process will often end badly.
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