There are too few active buyers in the real estate market these days -- but every one of them seems to be looking to buy a foreclosure or a short sale.Foreclosure is a fairly well understood process, but as "short sale" signs sprout like weeds, you may wonder what it's all about.
When a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it's called a short sale. The lender forgives the remaining balance of the loan.
Everyone loses -- or winsShort sales are a mixed bag for the buyer, the seller and the lender.
If you're a seller, a short sale is likely to damage your credit -- but not as badly as a foreclosure. You'll also walk away from your home without a penny from the deal, making it difficult for you to find another place to live.
The buyer gets the property at a reduced price, but the property in all likelihood has its share of problems -- think fixer-upper -- and will need to go through considerable red tape in order to make the deal happen.
Two short-sale killers
- No default on loan -- Lenders almost never will accept short sale offers or requests for short sales until the borrower is far behind in payments and a notice of default has been issued.
- Bankruptcy -- If the seller has filed for bankruptcy, forget it. Few, if any, lenders will consider a short sale when the seller has filed for bankruptcy because negotiating a short sale is considered a collection activity and collection activities are prohibited in bankruptcies.
The lender takes a financial loss, but perhaps not as large a loss as it might if it forecloses on the property.
Before you even start considering getting involved in a short sale, there are two situations in which an attempt at a short sale is almost certain to fail.
Can it work for you?Buying a home in a short sale can be a hassle, so why should you consider it? Mainly, it boils down to the bottom line. You will get the property for a substantial discount. Since the lender is eager to continue to get paid back the money it loaned out -- it may also offer favorable financing terms.
Since the seller plays an active role in the short sale process, you will have their cooperation (and most likely won't need to evict them upon taking possession of the home). This is not always the case with a property that has gone through foreclosure.