Short Sales

Posted: 11 May 2008 | Categories: Investing

What is a Short Sale?
A short sale refers to a transaction when a buyer can purchase a home for less than the remaining loan amount. The advantage is the buyer can save a significant amount on the purchase price, as long as the buyer is willing to take part in a more complicated transaction. The transaction is more complicated because it requires both the lender and the home owner to agree to the purchase price, as opposed to a “normal” sale when the homeowner can make that decision on their own. This is because the lender will receive less money from a short sale than they would have received if the homeowner paid the full amount of the loan.

Who benefits from a Short Sale?
All parties involved in the transaction benefit. The lender benefits by avoiding the costs of foreclosing on the property, which are often higher than taking the loss on the loan. The homeowner benefits by avoiding a foreclosure, which can damage their credit history and raise the costs of borrowing money in the future. The buyer benefits by purchasing the property at a discounted price, since the homeowner and lender are both highly motivated sellers.

Free Search 1000’s of Bargain Homes!

Where does a Buyer begin?
There are two things to keep in mind when thinking about doing a short sale. As the buyer, you need to approach the homeowner to start the short sale process. This is because the majority of banks will agree to a short sale only after the homeowner has received a formal offer. Also, make sure that there is a pre-workout agreement between the lender and the homeowner. This agreement helps make sure the short sale negotiations will go smoothly.

Requesting a Short Sale
First, locate a property where the debt of the homeowner is more than the amount the property can be sold for. Approach the homeowner and make a formal offer on the property. Keep in mind a short sale can take anywhere between 1-6 months to complete. There is a slew of documentation to submit before a short sale can be approved. These documents generally include: a short sale application, tax returns, pay stubs, a hardship letter, a purchase agreement from the buyer, financial statements, and payoff letters from all lenders involved. After submitting the documentation, it generally takes 2-6 weeks to receive lender feedback on the application. Don’t be discouraged by the wait. Remember, the goal for the buyer is to obtain property at a bargain-basement price.

Pre-Workout Agreements
Most lenders require a pre-workout agreement prior to starting workout negotiations. Pre-workout agreements can take a variety of forms that range from a brief letter to a detailed contract that lays the foundation for future negotiations between the defaulting borrower and the lender. A well-written agreement establishes the history of the loan and the procedure for negotiating the short sale. It protects the borrower by preventing the lender from foreclosing on the property during the workout and allows the lender to avoid potential lender liability claims and defenses against their right to foreclose.

Find Homes from $10K with RealtyStore.com

Tips for the Buyer

•	Use a realtor experienced in short sales.

Short Sales and Today’s Mortgage Crisis
Today’s mortgage crisis is leading to an increase in the number of short sales and presenting wonderful buying opportunities for the willing buyer. Declining home values are causing a huge drop off in home equity (the property’s market value minus the loan amount) and homeowners are struggling to meet their monthly payments due to mortgage interest rate hikes. Distressed homeowners are no longer able to refinance their way out of unmanageable loans. We are seeing historically high foreclosure rates across the country due to eroding home values and problems in the credit markets.

The Mortgage Forgiveness Debt Relief Act was recently passed by the federal government to help address this growing problem. Prior to its passage, the amount forgiven in a short sale was reported as taxable income. Now, distressed homeowners don’t need to worry about income tax liabilities when considering short sales. This legislation is leading more people to take the short sale route and as a result, providing the buyer with a larger pool of discounted properties to choose from.

Conclusion
“There is no sign that we’re near the bottom in the housing market,” states Douglas Elmendorf, a senior fellow at Brookings Institution and a Former Fed economist. Housing prices are predicted to fall in the next few years and short sales will continue to play a significant role in the real estate market. This is a great opportunity for a buyer to purchase discounted property and at the same time help a distressed homeowner save their credit history.

original :Real Estate Foreclosures