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Short Sales: Facts and Fantasies

 


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Short Sales are a hot issue among real estate agents and bank owners alike these days. The reason being is that with the crash of the market many people are losing their homes. In a nut shell short sales are a way for people to avoid foreclosure by cutting their losses and selling their home short of what they paid for it. But that’s a just a general view of it. Let’s take a look at the more detailed aspects of what this process is and what the advantages and disadvantages are.

Once the housing market crashed, and home values dropped dramatically, it put a lot of borrowers in a tight position because they could not sell their home. Many borrowers have found themselves unhappy with their current situation because their mortgage is “underwater”, and they feel they may never have equity in the home again. Some people may have already tried their best to qualify for a loan modification, but they did not make enough money and could not find relief. One way to handle this problem is to pursue a short sale (SS). Short sales is an agreement with the bank to sell the property for less then what is owed on it. The effect of this is far better than letting the property go into foreclosure which may damage your credit anywhere from 200-300+ points for up to 7 years. The short sale will remain on your report for about 3 years, and if you work on rebuilding your credit after the sale goes through, it could be as if it never even took place. Some borrowers who started the process while current on their mortgage payment only saw a reduction of 100 points.

What many borrowers fail to realize is that they may still be liable for the deficiency. It is important to be sure that there is a clear, contractual, legal separation between the borrower and the lender. Borrowers that correctly complete an SS can help ensure that they are free from any obligation to pay back any deficiencies. In addition to avoiding the debt of the 1st lien, the SS negotiating process is the best way to settle the debt with any junior lien holders. Gaining approval for a payoff of a 2nd or 3rd lien holder is important, and can hold up the process. Working out the debt with the junior lien holders is not only crucial for the process to be completed, but it is also crucial to protect the borrower from having to deal with those debts.

Be careful when choosing an agent to work with. Getting an approval on an SS is not the same thing as a regular sale. Many agents are good at listing properties, but they do not know how to handle the short sale/loss mitigation departments at the banks. Short sales are limited to a very short time period. Just because you start a short sale does not mean the bank cannot still foreclose on the property. Your negotiator needs to understand how to work with the bank on supplying the documents to prove the financial hardship; one missing document can put the sale at risk. Knowing how to work with the short sale department of the bank is something that takes experience.

Banks always have a bottom line as to what price they are willing to approve for an SS. A good negotiator is going to get the bank to approve a reasonable net amount to the bank. Just because there is a buyer, does not mean the bank will automatically sell it. It is important to know how to setup the net sheet and how to get the bank to approve it. Having experienced agents will help insure a smooth approval process, and a quicker closing. Do not under estimate the importance of details in the short sale process.

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