Short sales: The new marketplace
- Theresa Grant
- May 3, 2013
- 4 min read
Even in Lake Arrowhead and our surrounding mountain communities, where life is affordable and fun, homeowners can find themselves in the position of owing more on their mortgage than their home is worth. This is popularly called being “under water” on your mortgage. Sometimes owners can hold on because they have cash reserves or the ability to make their payments in the hope of riding out the market. Some owners just can’t do it, and stop their payments and start the foreclosure process. Both of these types of owners are actually excellent candidates to “short sale”, in which the mortgage holder agrees to accept less than mortgage value when the house is sold.
Buyers of short sales, here’s what you need to know: As of June 1, 2012 a law went into effect than requires lenders to review and respond to short sale requests within 30 days of a short sale package request, and make a final decision within 60 days. The old-school horror stories of short sales being in limbo for six months, a year, or even more are now just that: Stories designed to instill fear that you can’t actually have the house you’d like to offer on, and encourage you to move on to offering on a home that isn’t in a distressed financial situation that may require a real estate agent to spend more time and paperwork to close. The reality of the marketplace is that a conventional home loan takes about 30 days to process, and an FHA home loan takes about 45 days to process. Many times loans go into overtime in the underwriting phase of loan approval anyway. You’re already going to be into the home loan process for 45 days; is another two weeks truly an issue? The thing to remember is this: When the existing mortgage holder agrees to the short sale, they typically want to close within 18 days of the approval being made. This means your loan financing must already be approved, with the condition of an appraisal being made, to be able to close escrow on time. It’s really not complicated. Short sales typically sell at Fair Market Value (FMV) and are often just as good an investment as the non-distressed house down the street. There’s nothing to be afraid of.
There are two kinds of short sales: Hardship and Strategic.
A hardship short sale is when the homeowner has a genuine problem that has impacted their ability to pay their mortgage. This could be a situation such as unemployment, health issues, divorce, an increase in mortgage payments due to a variable rate mortgage, reduction of income, or any other circumstance that makes it completely impossible to continue paying the monthly mortgage due. Often a hardship sale candidate has been denied a loan modification and the foreclosure process may have already begun. In a hardship short sale situation, listing a property for sale with a certified SFR agent (Short Sale and Foreclosure Resource) can help postpone the foreclosure process and allow time to complete a short sale. The banks aren’t in the business of owning and selling real estate; it’s costly for them to foreclose on a property and maintain it through resale. They really are motivated to complete a short sale if it makes reasonable financial sense for all parties involved.
A strategic short sale is when a homeowner can technically make the payments on their existing mortgage, but there is so much negative equity in the home that it bleeds their bank account dry. In this situation a homeowner considers their financial health and recovery a priority because they just can’t see a way out from under all their debt. In a strategic short sale the homeowner is usually current on their payments but they are drowning in debt, and it would not take much to turn their situation from a financial problem to a true hardship.
What’s the impact of a short sale for a seller or a buyer?
For a seller there can be tax implications to a short sale, and yes, a short sale can affect your credit score. However, the hit to your credit score for a short sale is far less than that of an actual foreclosure. A foreclosure stays on your credit report for 7 years, but a short sale is reflected as a “workout” of debt. In addition you could stop the impact of having repeated 30-day-late reports on your credit if you’re not making your mortgage payments, which does additional damage every month on top of the financial injury of eventually having a foreclosure on your record.
For a buyer, the short sale is an investment of time. That’s pretty much it. A buyer needs to start the loan process so they can close quickly as soon as the existing mortgage holder gives the green-light to complete the sale. Other than that, it’s the 60 day wait to get that approval to close.
The short sale marketplace is expected to be the driving force of real estate not just in California for the next several years. It’s the “new marketplace” in the “new normal” of real estate. I can help you navigate it with ease – just pick up the phone and call me at (909) 336-7933. I’m happy to help.
Theresa Grant is a certified SFR through the National Association of Realtors, and is trusted by 21 banks and financial institutions with their Real Estate Owned inventory. She is also individually certified as a Short Sale Preferred Agent (or equivalent) with Chase, Citi, Wells Fargo, and Bank of America. Theresa can be reached at (909) 336-7933 or you can use the contact form below to ask for more information.
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