What is Short Sale? How Can I Buy or Sell Short Sale as an Investor?
A Short sale is a term used in the real estate industry to describe when an owner of property sells it for less than what they owe on their mortgage. The seller may be able to avoid foreclosure by selling at this price, but if there exists any liens or other debts against the property that exceeds its value, then the buyer will have to pay those off before taking possession of the home. This can cause problems with title insurance and closing costs. If you're considering buying a house through a Short Sale, make sure your lender has approved the sale as well as all necessary inspections and repairs prior to purchase. You should also check out our article about how to buy a foreclosed home.
Foreclosure: this occurs when a homeowner stops making payments on his/her mortgage loan. When a borrower fails to meet payment obligations on a mortgage, lenders typically take steps to protect themselves from loss. Lenders usually begin by sending notices to borrowers informing them that they must either start paying back money owed within a certain amount of time or face legal action. After missing several payments, lenders file court papers requesting permission to repossess the mortgaged property. Once the court grants permission, lenders sell properties at auction to recover losses incurred during the process. In some cases, banks hire third-party companies called "foreclosing attorneys" to handle these auctions instead of handling them internally.
Foreclosure Vs. Short sale
The variation between a foreclosure and a short sale is simple - one involves the bank while the other does not. With a short sale, the lending financial institution agrees to accept less than full repayment of the outstanding debt so long as the remaining balance is paid over a period of years rather than immediately. As such, a short sale allows homeowners who cannot afford their mortgages to keep living in their homes without worrying about losing everything. On the flip side, a foreclosure means that the bank takes ownership of the property after failing to receive enough funds to cover the entire mortgage balance. In contrast, both options involve financial hardship, only one results in the total destruction of the family's assets.
How to Buy Property Through A Short Sale
If you're looking into purchasing a home through a short sale, here are three things you need to know first.
1. Your Loan Officer Has Approved It
Before you even think of giving down a deposit on a new home, you need to find out whether or not your lending firm has given approval for a short sale. Some lenders require that sellers complete paperwork proving that they qualify financially for a short sale; others simply ask for proof that the seller intends to move quickly. Regardless of which type of documentation you provide, make sure that your lender approves the transaction before proceeding further.
2. Make Sure That All Inspections Are Complete And Paid For
Once you get the green light from your lender, you'll want to ensure that every inspection required under state law has been completed and paid for. These include pest control, radon testing, lead paint removal, flood damage reports, etc. Failure to do this can cause delays or additional fees being charged to close escrow.
3. Get Preapproved Before Putting Down Any Money
Finally, once all inspections have been done and approved, it's time to put down a small portion of what you plan to pay for the house. This will give you an idea of how much cash you can expect to spend each month moving forward. In case you are planning to use a traditional mortgage, this step isn't necessary because most lenders already preapprove buyers based on income levels. However, if you intend to finance with private capital, then you.
When purchasing a home via a Short Sale, there are special considerations involved:
1. Title Insurance - Because the transaction involves two parties who do not own 100% interest in the property, the new buyers need to get title insurance to cover potential issues such as unpaid taxes, liens, etc.
2. Closing Costs - Since the sellers cannot afford to close escrow due to the shortfall between the sales price and outstanding debt, the bank holding the note will often absorb most of the cost associated with closing the deal. However, since the bank does not want to lose money on the deal, they might charge extra fees to compensate. Make sure to ask questions regarding closing costs upfront so you know what's going into the final numbers.
3. Inspection Fees - As mentioned above, because the property was sold under distressed circumstances, many homes require extensive repair work. These expenses could easily add tens of thousands of dollars to the total cost of the home. It's important to understand upfront whether inspection fees are included in the asking price.
4. Mortgage Payments - While the original owners were responsible for paying monthly installments towards the mortgage's principal balance, once the property goes into foreclosure, the new owners become liable for the full amount of the remaining balance. Therefore, even though the previous homeowners stopped making payments, the new owners still ended up having to continue making regular payments toward the entire amount of the mortgage.
5. Taxes & Utilities - The former owners often failed to keep current on their utility bills, which means that utilities like electricity and natural gas providers won't turn power or heat on until after the new owners move in. Additionally, the city where the property resides may impose additional charges on the new owners for things like trash collection, snow removal, street cleaning, etc.
6. Homeowner's Association Dues - Most communities have an HOA whose purpose is to maintain common areas like landscaping, pools, tennis courts, etc. The association also collects dues from all members to pay for services provided. If your offer includes an assumption agreement, make sure it covers any existing debts related to this expense. Otherwise, be prepared to assume responsibility for future assessments if necessary.
7. Credit Report - Before buying a house, prospective buyers should check credit reports thoroughly to ensure no errors exist. This can help avoid surprises later down the road.
Frequently Asked Questions
How much equity am I giving up?
The answer depends on how far behind the loan is current. For example, let’s say the lender has $100k left on loan, but the home sells for $150k. In this case, the borrower would give up about 30%. On the other hand, if there is only $10k left on loan and the sale price is $120k, then the borrower gives up 90% of his/her equity.
What happens when my buyer defaults?
If the borrower fails to complete the purchase within 60 days, he/she loses ownership rights over the property. At that point, the seller becomes entitled to retain possession of the property without further obligation to the defaulting party.
Who Can use Short Sale?
Any person who owns real estate as either owner-occupant or co-borrower can qualify for short sale approval. A “short sale” occurs when one borrower owes more than the value of the property being purchased by the second borrower.
Can I cash out of my contract early?
Yes! You can terminate your contract at any time before the expiration date listed on the contract. To do so, simply contact your agent and request a cancellation.
Is there something else I need to know?
There are many factors involved with selling a property through a short sale process. It requires extensive knowledge of local laws, regulations, and procedures.
Selling a property using a short sale takes time and patience. However, we believe our article provides some helpful information regarding what to expect during the entire process.
When purchasing a home, most people want to find something they love and feel comfortable living in. But sometimes, finding just the right place isn’t easy. That’s why it pays to shop around – especially when looking for homes in the same neighborhood.