How Does a Short Sale Work?
You’ve probably heard of them, you probably know someone who is going through one, but you may not understand exactly what one is.
A short sale occurs when a mortgage company agrees to accept less than what is owed for the sale of a home.
Let me give you an example to demonstrate the point.
Mr. and Mrs. Smith (sellers) are no longer able to make their mortgage payments and have let the bank know they will be engaging the help of a real estate agent to market the sale of the home. The agent provided Mr. and Mrs. Smith a comparable market analysis (CMA), and said the value of the home was approximately $300,000 – $325,000. Unfortunately, Mr. and Mrs. Smith bought when the market was at it’s peak 5 years ago and they owe $380,000. The deficit is $55,000-$80,000 and if the sellers sell their house for market value, they will short the bank this amount.
How does it work?
Here are the steps:
1. The sellers have hardship (divorce, loss of job, illness, etc.) and can no longer meet their mortgage obligation
2. The sellers should talk with the mortgage company to see if they would do a loan modification (make a change to the terms of the current mortgage in an effort to reduce the current payment) or if the bank has any other alternative to help them stay in the home
3. Once it is determined that the bank can’t help the seller stay in the home, the seller should interview local short sale experts. This is a very important step because the skills needed to navigate a short sale are very different than a home sale with equity
4. Put the home on the market. One of the differences in marketing a short sale than a home with equity is that while preparing a home for a short sale, no money or very little money should be spent in making improvements to the home
5. Once an offer comes in, the agent will review the price and terms with the sellers. If the sellers accept the offer, they send the contract to the bank or banks for their approval. This is where the fun begins. The process for getting the banks approval (also called third party approval) can take time. I have seen them approved in 3 weeks (rare) and up to over a year
6. The buyer can still do their property inspections but are likely to meet resistance if they ask for any repairs as the sellers may not have the ability to pay for any repairs and the banks are not likely to make any repairs either
7. The bank/s will make their decision and will send the approval back in writing. If the sellers agree to the terms, it’s time to prepare for closing
8. The buyer will now submit all final loan paperwork, the appraisal will be ordered and closing will be scheduled (typically within 30 days)
No two short sales are alike. All of them will try your patience and proper expectations should be set for the buyer and seller of a short sale.
There are currently 13 active short sales in Arnold and 15 in the 21409 zip code. It’s important to know there are plenty of options to explore to avoid foreclosure. If you know someone who is struggling, please share this blog with them and help them take their first step to freedom.