I thought about this as a topic for an article because my husband had a buyer make an offer recently on a “Short Sale” property that turned into an interesting scenario. Randy (my husband) prepared his client for the short sale process, i.e.: the length of time the transaction could take, that you must have a strong offer going to the bank, that you must be prepared to act quickly and so on. This deal wouldn’t end up being a short sale because the property would sell for more than the loan. The owner who had let his property go into default would now walk away with cash. This brings up the questions about how someone (and their broker) could not know what defines a short sale, and would allow this to happen.
With that in mind I thought I would let you test your knowledge and clear up some of the misconceptions about short sales.
So let’s see how much you know or don’t know.
- What is a short sale?
- When a property sells for less than its current market value
- When a listing sells for below the amount the seller owes on the mortgage
- When a listing is sold in a short amount of time
- All of the above
- Which of the following circumstances are appropriate for a short sale?
- When a seller needs to relocate soon due to career change
- When a seller has to move quickly into a larger or smaller home due to family issues
- When a seller loses his or her job
- All of the above
- How long does it usually take a lender to review a short sale package?
- Between one and two weeks
- About a month
- Between two and four months
- About six months
- When is a short sale offer accepted?
- When the seller accepts the offer
- When the lender is informed on the offer
- When the lender approves of the offer verbally or in writing
- When a contract is formed between buyer and seller
- Which of the following is a potential downside of short sales?
- The lender may demand a cut in the real estate agent’s commission
- The short sale can negatively impact the seller’s credit score
- The seller may have to sign a note promising to pay back remaining mortgage debt
- All of the Above
Now let’s see how well you did. I have also included a short explanation of the correct answer.
1 – B. If the seller owes the lender more than the property can be sold for and does not have other funds to make up the difference at closing, that transaction is considered a short sale.
2- D. Up until recently, lenders defined financial hardship very narrowly, involving extenuating circumstances such as job loss or major medical bills. However, as foreclosures have spiked in recent months, lenders have become much more flexible in what they consider hardship. They’re more willing to work with sellers to keep them from walking away from their homes.
3- C. Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package WILL take months.
4- D. To be considered “accepted” a formal contract for a short sale must be developed that is approved by the buyer, the seller, and the lender.
5 –D. Lenders have sometimes required that agents take a commission cut as a condition of the sale contract. Also, forgiven mortgage debt can lower sellers’ credit scores. Finally, sellers might have to sign a promissory note agreeing to pay back the amount of the mortgage loan not covered by the short sale.
One section we do in the Professional Real Estate Investor class is learning about all the documents that makes up a short sale package. There are good deals that can be found through short sale but it takes knowledge, flexibility and patience.
However we are seeing fewer and fewer short sales. For example in California approximately 33 percent of sellers received no net cash from the sale of their home in 2009; in 2011 it was down 11% to 22%.
So if you think short sales are for you it’s time to move.