In recent years, it has become common for homebuyers and investors to look toward distressed properties for great deals on homes. Often, buyers can get homes via short sale or foreclosure for much less than the home's original purchase price. You're probably already familiar with the definition of foreclosure, but what about short sales?
As a general definition, a short sale involves the sale of a house that is no longer worth the amount of the mortgage loan. Short sales keep owners from going into foreclosure, which is detrimental to their credit scores. While the situation is not ideal for either the owner or the bank, it just might be the only economical option they have.
As an example, let's consider the hypothetical Smith family. The Smiths bought their home for $200,000. Five years later, they have paid $40,000 in principle, which means they have $160,000 left on their mortgage. Mr. Smith has lost his job and has not been able to find more work. The Smiths cannot afford to make their mortgage payments anymore, but they know that going into foreclosure will hurt their credit and make it more difficult to buy another home in the future. They decide that selling is their only option. The real estate market been in a major slump in their area, leading to a drop in property values. As a result, their home now appraises for $130,000. The Smiths do not have $30,000 to make up the difference in what they owe, so they approach the bank about a short sale. What happens next?
First, the bank must approve the home for a short sale. To demonstrate their circumstances, the Smiths send the bank a hardship letter, explaining that Mr. Smith has lost his job. With the letter, they send paystubs, bank statements, and proof of other assets. Now, it's up to the bank to decide whether a short sale or a foreclosure will present less of a loss. Luckily, the bank approves the short sale.
But as those in the real estate business like to say, there's nothing short about a short sale. Because the owner and buyer must wait for the bank to approve an offer, a short sale takes much longer than a private sale would. The buyer must have patience and time to wait for the third party's approval process. Though the bank takes a loss, and the owners lose any future equity they might have been able to accrue in the house, the buyer gets a great deal on a home that's usually in good condition.
Oh, and after the sale of their home, the hypothetical Smiths move to a new state, where Mr. Smith lands a great job, and they all live happily ever after.
What is your opinion of short sales? Have you ever participated in one? Was the process smooth, or were there a lot of roadblocks along the way? Let us know in the comments below!