Keeping It Real In the Real Estate Market – What Buyers Need to Know About Short Sales

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Clearly in this buyers’ market people looking at homes to purchase are considering all options. It is also no surprise that sellers who are faced with financial strife or difficult situations arising from steep drops in the value of their homes are turning to alternatives. From the seller’s perspective, short sales are a way to hold on to some dignity while not entirely messing up their credit outlook. But what about from a buyer’s perspective? In this article, we’ve put together three important aspects of being a short sale buyer that every homebuyer should consider.

What Does the “Short” in “Short Sale” Really Mean?

We have all heard the recent buzz words “short sale” but do you, as a buyer, truly understand what it means? As a buyer, it can mean a great deal for you on a home that would otherwise cost you more than an arm and a leg. Simply put, a short sale is when the amount owed on a property is greater than the amount the property is currently valued at. For owners in this situation, it can engulf them like quicksand given the huge dips in property values lately. For prospective buyers, though, it is an opportunity to buy a home for less, knowing that in just a few years it will gain value.

Example: A home currently valued at $300,000 has a mortgage owed on it for $500,000. Sellers must appeal to the bank to release them of the liability – a difference of $200,000. If approved, the original payoff will be shorted to reflect the new value of the home. This is an alternative to foreclosure but it means that the banks are taking a huge loss and usually the homeowners cannot afford the current mortgage.

Rule Number One – BE PATIENT

Properties that will be considered as short sales usually have the homeowners still living in the home. Their first step will be to approach the lender and apply for a short sale. Consider this: there are many steps from the moment the homeowners put in an application to the time you are given the keys, if approved. The time it takes can be long and arduous – something that makes sense given the large numbers of short sales banks are contending with these days. Be prepared to wait anywhere from 3 months to even a year for the entire thing to process.

Rule Number Two – FLEXIBILITY IS KEY

Short sales are nothing like the traditional home purchase process. Unlike a regular transaction, you will not be given any disclosure statements. Further, and very importantly, once an inspection is performed, the sellers will most likely not be able to afford to pay for any of the necessary fix-ups. Short sales are considered “as is” sales and though they can be risky, the benefits usually outweigh the risks. In addition to the obvious fact that Realtors are very well versed in this relatively new phenomenon, an advantage to using a Realtor for the short sale process is their negotiation skills. Realtors often can convince banks to reduce the price or give credit in cases where there are major issues with the property. Though it is not fool proof, it is definitely a viable option for many and worth the fifty-fifty chance.

Rule Number Three – BE REALISTIC

It is not exactly like you are dealing with the friendly couple selling their home through the regular real estate channels. You will be dealing with a bank, and as cold and harsh as that may sound, it is true that banks simply do not care in many cases. Do your best to keep expectations at bay. Know that incomplete or inaccurate information (on both the buyer’s and seller’s part) can negatively affect the outcome of your potential purchase. Given that they are dealing with dozens of short sales each month these days, banks gladly move on to the next application if something is amiss.

Things To Know About the Not-So-Common Knowledge of Short Sales

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When families find themselves staring at the prospect of losing their home to whatever reason, whether job loss, downsizing, relocation or anything else that is unforeseen – many times they feel cornered and unable to see the options. For years during the current economic state that has resulted in an unstable real estate market, the answer seemed to be foreclosures. But more and more often, short sales are taking over as the alternate choice.

Here are three things worth knowing about short sales:

It Doesn’t Hurt to Ask For An Adjustment

Many people do not realize the benefits of simply engaging in dialogue with their banks. With the large number of distress sales out there these days, banks are far more willing to engage in conversations about alternatives to foreclosure. Foreclosures end up costing lending institutions thousands of dollars to litigate, plus hours of time and resource put in to handle each case. By expressing the desire to explore a loan modification, banks are relieved of this stress and are likely to agree with a loan modification.

Through an adjustment of your current interest rate, you may be able to afford the same home and spare you and your family the difficult process and impending negative impact of a foreclosure. Not only does a loan modification save homeowners money, it also protects their credit from long-term negative affects otherwise experienced with foreclosures.

Know What The Tax Man (Or Woman) Has To Say

Short sales are a great way to spare a family of much pain but there are tax implications. Like anything else, before embarking on this financial shift with the ownership of your home, it is a good idea to familiarize yourself with everything you need to know about the taxes involved. In short, the tax liability works like this: On a mortgage with $200,000 owed that has a short sale of $100,000, there is that remaining $100,000 left that will show up on a 1099 in your name. This translates to income and should be managed with a tax advisor so you understand all there is to know about that real estate income.

All Players Must Agree to the Terms

A lot of times mortgages involve multiple lenders. When those homes are being purchased, surely the thought of needing to do a short sale was not a consideration. Now that you do find yourself looking at a short sale, it is essential to iron out the terms of agreement with all lenders involved.

When there is more than one lender the secondary bank must agree to give the primary lender a portion of the liability on the difference to you. This sounds easy enough but since this can be a matter of lender-specific policy, you may come across a lender that is unwilling to agree to this term of a short sale. By researching in advance the number of banks that are involved and what their respective policies are regarding short sales, you will cover important bases and be far more prepared.
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Short sales are a choice that offers many families reason to hope and a path to dream the reality of living in their own home again, without struggling to manage the mortgage. Armed with the key knowledge necessary to tackle this newest intervention on the real estate woes of many, you can and will hope to succeed in your housing endeavor and look forward to a positive outlook!