What is a Short Sale?
Short Sale seems to be the current buzz word in Real Estate. Short sales refer to homeowners, trying to sell their home, but are underwater. That is, homeowners whose homes are worth less than they owe on their mortgages…and someone has “to take the loss in the shorts”. Most sellers can’t pay the difference to sell their homes; therefore it is up to Mortgage Company to agree to “take the loss in the shorts” and release their liens on the property so that title to the property can be transferred to the buyer. If the mortgage company does not agree to take the loss and the homeowner is behind on the mortgage, it will most likely go into foreclosure. If you are thinking about buying or selling a short sale property there are a few things you will need to know before entering into a transaction.
Benefits: Short sales have benefits for all parties involved. For the seller, it’s a way–usually the only way–to avoid foreclosure. Short sales are less damaging to credit, and they carry fewer stigmas because the seller is doing what they can to meet her obligation rather than just walking away. The mortgage company, which is in the business of financing real estate, not selling it, also benefit more from short sales than from foreclosures. There’s no doubt that foreclosures are a major expense. Vacant properties deteriorate quickly and are vulnerable to vandals. In addition, the sale prices of foreclosures usually are substantially less than the prices of comparable regular market homes. For a buyer, a short sale presents the opportunity to purchase a home for less than market value, with less risk than they would face if the Buyer were to purchase a foreclosure. Short sales are listed in much the same way as any other home, with full disclosure of known defects. In a foreclosure, the bank or corporate owner makes no claims as to the condition of the home. In addition, a home up for short sale is occupied, or was occupied until recently. This makes vacancy-related deterioration less likely.
Drawbacks: A short-sale seller takes a credit hit, albeit not as serious a hit as she’d face with a foreclosure. In addition, the Seller may be liable for paying taxes on the difference between the amount she owes on her mortgage and the sale price of the home. The Mortgage Debt Relief Act of 2007 excludes many sellers from this tax liability, but protection depends on a number of factors that should be discussed with a lawyer or tax professional. The drawback for the lender is obvious: It loses both the amount of the principal that goes unpaid and the interest that would have been due over the remaining term of the mortgage. Buyers of short sales can be dragged through a long, laborious process. Short sales may take far longer to close than a typical sale. It’s not unusual for lenders to take weeks or months to respond to offers. In addition, a Bank Owned (foreclosed) home will be sold as is—usually the bank will not make repairs. With a short sale, the seller’s disclosure of defects offers some protection. Although, a very thorough home inspection is in order for any home you want to purchase.