Definitions: Short Sale

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Aug 162013
 

Definitions: Short Sale

The definition of a short sale is when a homeowner owes more to their current mortgage lender than they can sell the house for on the open market and sells the house for the market price
after negotiating with their lender to accept less.

For example, Henrietta and John own a single family house. The balance on their current mortgage is $267,000. John lost his job and they wish to sell the house to relocate to another state for better employment opportunities. They invite local Realtors to make a “Listing Presentation” as to how much Henrietta and John’s house could sell for under current market conditions. The consensus among these Realtors is a price range of $195,000-$220,000.

Henrietta and John owe more than the house can be sold for. They retain the services of a local attorney who specializes in negotiating short sales. Their attorney then negotiates with their existing Lender to accept less than the $267,000 owed on the house and basically to accept payment based on whatever Henrietta and John can sell the house for.

The negotiating of the short sale is a complicated and difficult process. Henrietta and John’s attorney will need to present comprehensive income documentation to their Lender. The Lender will in turn conduct it’s own analysis of the value of the house and the merits of accepting Henrietta and John’s offer of less money rather than conducting a foreclosure proceeding.

Thanks to recent Federal Government initiatives, the process to negotiate a short sale has become easier. What used to take nearly a year to accomplish can now be negotiated in as little as 45 days, although the average processing time for a short sale approval is probably closer to six months.

When Henrietta and John receive the approval for their short sale, there will be some fundamental conditions in place.

1. Their Lender will receive ALL proceeds of the sale AFTER Henrietta and John have paid customary closing fees for their locale and real estate commissions and legal fees to their attorney.

2. They will not be allowed to receive any funds in their pocket.

3. Their Lender may reserve the right to obtain a “deficiency judgment” against Henrietta and John for the amount of the mortgage loan left unpaid by the approved short sale.

What does a short sale mean for a Homebuyer?

1. Be PATIENT. You may have a considerable waiting period from the time you sign a contract of sale to the point when the short sale is approved on the house you are buying.

2. Get your Mortgage Approval and MAINTAIN your financial status. Once your mortgage loan application is approved and your Lender issues a loan commitment, be sure your Income, Assets, and Credit stay the same as when you made your loan application. Because it may be some time before you close, your Lender will update your documentation used for the loan approval. If your financial situation changes, you may lose your approval altogether.

3. You can’t get Something For Nothing. Don’t think you can get a house in a short sale situation for “fire sale” prices. After all, the house didn’t get burned in a fire, the Homeowner simply owes more than current market prices will bear. If you offer substantially below the market price, chances are the Lender approving the short sale for the homeowner may counter your offer to a higher price. This is based on their independent analysis of market prices for similar homes in close proximity to the house you are buying.

Do you have questions?  Click on ASK TREVOR and I’ll respond to any and all inquiries, even if you’re not buying a home in New York State.

Check out my Trulia profile HERE

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Find me on TWITTER: @tcurranmortgage

Ask Trevor A Question
Nov 222011
 

Wow, 27+ years as a Mortgage Banker! I have seen the occasional short appraisal! I started in November 1989 because I wanted to become a Homeowner so I chose a path which would get me there: Mortgage Professional.

Times were tough back in that market.  Interest rates were high and property values had dropped dramatically.  The employment picture for many Americans wasn’t very promising.  There were a lot of foreclosures and homeowners had a hard time refinancing their mortgages due to lost equity.  Sounds very similar to our recent post-meltdown market with the exception of the interest rates (11% in 1989!!!).

I received a valuable part of my education early on in my career as I dealt with purchase transactions where the appraisal came in for less than the purchase price.  Buyers, Sellers and their respective Realtors are all “IN IT TO WIN IT” and make the deal happen.

How you see your house!

I carry that education with me to this day when my HomeBuyer clients ask me at application time, “What happens if the appraisal comes in for less than the Purchase Price?”   I know many HomeBuyers may think it’s a NO-BRAINER: the Seller will automatically reduce the price.  But that is NOT the case right out of the gate.  Here’s what I learned all those years ago about appraisals that come in short:

How the Appraiser sees your house

When the bank appraisal comes in for less than the contract price

there are FOUR ways to proceed with the transaction.

 

  1. The Purchaser comes up with the difference in cash. If the appraisal is less than the Purchase price, the Seller basically assumes the Purchaser wishes to buy the house according to the terms of the contract, including the agreed upon Purchase Price. Therefore, the Seller assumes the Purchaser will come up with the cash necessary to complete the transaction.
  2. The Purchaser and the Seller meet in the middle. The Purchaser comes up with some cash but the Seller also agrees to reduce the price enough to meet the Purchaser somewhere “in the middle.”  Both sides want to complete the transaction and so they work it out.  This is compromise at its best.
  3. The Seller reduces the Purchase Price to equal the Appraised value. This is the least likely scenario, but not an impossible one.  Sellers often want to complete the purchase transaction on the original terms of the contract, including the price. But a determined Purchaser working with a great Realtor, by digging in and working hard to negotiate can often make it happen.
  4. Nothing happens and the deal is cancelled. The Purchaser either cannot or will not come up with the extra cash and the Seller refuses to reduce the price completely or even a little bit to meet the Purchaser.  In this case the transaction is cancelled, the Down Payment is returned, and everyone goes home unhappy.  The Purchaser has to begin all over again and the Seller has to put the house on the market and try to find a new Purchaser.

In the end, the motivations of all parties to make the deal happen and close the transaction rule the day.  Those motivations drive everyone to find a solution and get the deal closed.  Or not.

Do you have questions?  Click on ASK TREVOR and I’ll respond to any and all inquiries, even if you’re not buying a home in New York State.

Check out my Trulia profile HERE

Check out my Zillow profile HERE

Find me on TWITTER: @tcurranmortgage

Happy House Hunting!