Short sales are where a property is sold for less than what is owed on the property.  The lender forgives the debt and takes the loss.  Since the bank won’t be receiving 100% of the their loan repayment, there is a special approval process on buying short sales which can lengthen or cause the process to be longer.

The process of selling a short sale property begins like traditional sales, in which the buyer and seller are negotiating the written offer.  But there is an addition to the contract, stating “Subject to Lender Approval”.  Since the bank is losing the money, they need to approve the final price for the transaction.

Sometimes getting approval from the lender can be a time consuming process, but other times it can be surprisingly quick.  Be ready for anything with short sales.  Your offer could be rejected.

To guide you through the complicated process, picking a real estate agent familiar with short sales may help may it easier for you:

1. Closing dates could be delayed – It is inveitable in a short sale that a closing may be delayed past the typically normal closing from 30 to 45 days.  It could take much longer than that.  It all depends on the bank.
2. The offer is rejected – The bank may receive multiple offers during the long approval process.  Of course, they are likely to pick the best one.
3. Multiple liens on the property – Many homes going through short sales have multiple mortgages on the house.  If you have more than one to deal with, you are guaranteed that it will take longer to close the deal.  Both banks need to agree to payoff amounts.  Usually the first mortgage holder is paid back in full where the second holder is the one who gets the loss.  Thus, the 2nd mortgage holder will try to negotiate with the 1st mortgage holder to get something out of the deal.  If the bank doesn’t approve, the deal may go nowhere.  It takes both banks cooperation to close the deal.
4. There isn’t much you can do to speed things up – The agent is powerless.  All they can do is call the bank over and over and over again.  There is not much you can do to make the bank decide on the deal faster.  A lot of times they are already buried in a lot of short sales.
5. Is it a good deal? – Just because the home is being sold at a discount, doesn’t mean it is a good deal.  Make sure to research the local area.
6. Other fees and costs – Sellers are not responsible or likely in this type of short sale situation to take care of repairs.  The buyer’s agent commission may get reduced by the bank.

A short sale involves offering the home for sale via a MLS listing.  Potential home buyers will make appointments to view the home, some will try to make lowball offers, agents may hold open houses to get a buyer.

The basics:

Short sales will happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell or pay all the costs for the sale.  Not all lenders will negotiate a short sale, and that is why a real estate agent or lawayer can help you in contacting the lender’s loss mitigation department to find out.  It will be no surprise, that the lenders will look at other cash assets, the lender may want to tap into those accounts.

How is the seller’s credit affected?

Foreclosures or Deed-in-Lieu of foreclosure affect the credit the same.  Sellers will take a hit of 200 to 300 points, depending on overall condition of credit.  If the seller’s FICO score is 680, then it could dip as low as 380.

Short sales will show up on a credit card, just like a foreclosure.  The ding on credit will show up as pre-foreclosure status.  A short sale hit could be less, but it will still damage your credit.

Waiting Period to Buy another Home

Foreclosures or Deed-in-Lieu of Foreclosure may end up waiting for about 24 to 72 months before a lender will offer any kind of interest rate that will make sense.

Short sales can wait a shorter time.

Short Sale and Foreclosure Deficiency Judgment:

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid.  In California, purchase money  loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are.

If you are a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale.  The big advantage is that you’ll be able to buy a home sooner via a short sale versus foreclosures.  But you should seek legal and tax advice before making that decision.