Contributed by Gary Kersteen, Realtor (508)255-4949 x731
What Are They?
A short sale is the sale of property at a price that would net insufficient monies to cover outstanding liens on the property, and the owner cannot cover the shortfall from other assets.
It does NOT simply mean that the owner may realize a loss on the transaction relative to purchase price – the implication of the term is that there are insufficient owner funds to cover liens.
Why Would One Do a Short Sale?
There are any number of reasons people may find themselves in such circumstances that would require this. In a down real estate market any property may, at any given time, be valued by the “market” at less than the purchase price. Persons may have borrowed the full purchase price of the property. Subsequently, it may be that they cannot afford their variable rate mortgage because it has increased dramatically, or perhaps the owners must move because of employment (or lack of such); in such cases they cannot refinance because the appraisal will no longer cover the value of any loan nor will the proceeds of any sale in the current market cover the termination value of the mortgage. One recourse in such situations is to “bite the bullet” and sell the property “short” of its purchased value and negotiate with the financial institution for friendly terms to release the lien.
How to Think of a Short Sale… NOT Bankruptcy!
When a property owner chooses to proceed with a Short Sale, they remain in control of the process; they still own the property; they still have a mortgage. But, in order to be free of the property they need to be able pass title deed- and to do so requires the release of existing mortgages and liens. So, they need to negotiate other arrangements with the financial institution who might then release the lien and title. So think of “Short Sale” as a title issue… not foreclosure.
What Is the Process?
A property owner puts the property up for sale at current market value. A realtor must do a thorough and well documented comparative market analysis since the banks will want to review this along with any appraisal they would perform. In the description and/or comments sections of the listing, it should be clearly and straightforwardly stated that this is a Short Sale and that all parties must agree to the terms and timing associated with this process.
Upon receipt and acceptance of an offer (owner selects the best offer to his liking if there are multiple offers), the owner’s attorney will forward to the bank the offer, a letter of explanation and whatever other documentation the banks require. The request may solicit complete forgiveness of the loan, or it may request an unsecured long term loan for the balance due perhaps at no interest, or some other arrangement.
The banks process these Short Sale requests on a first come-first served basis. There is no expediting. The bank may negotiate through the owner’s attorney for better terms, pricing, commissions, etc. Upon approval by all three parties to the terms, the transaction usually must take place in very short order – in a matter of a few weeks typically.
What Specialties Should Be Involved?
It is extremely important to use attorneys (on both sides of the transaction) who have experience with Short Sales. While it may seem straightforward, experience eliminates problems and enables negotiations to proceed more smoothly; knowing the institutions and the administrators facilitates such transactions. Ask your prospective attorney if they have such experience.
What Does It Mean for the Buyer and the Seller?
Short Sales may provide good property value because of the circumstances of the seller. But it also requires patience and flexibility on the part of the buyer since the timing as well as the final terms of any agreement must be approved by the lending institution. Such financial companies are burdened with these requests, the backlog is full and the lead time may be lengthy. These may or may not be acceptable to a buyer, but everyone should be aware of these factors up front.