The short sale is a valuable and effective procedure for real estate investors and real estate agents. A short sale can be explained very easily, it is exactly what it sounds like. If a property is sold for an amount that is not great enough to pay off the mortgage on the property, the bank will have to take a loss in order for this sale to occur. Short sales exist when a homeowner falls behind on their mortgage payments and the bank is willing to accept a discount on their loan instead of foreclosing on the property. For example, a homeowner owes 100,000 dollars to their mortgage company and can only sell their house for 90,000 dollars due to the property being in disrepair. If this house is sold for this amount, after paying the real estate agent five percent commission and paying closing costs the mortgage company will receive approximately 83,000 dollars. If you look at the original amount owed to the mortgage company, it is easy to see that the mortgage company just lost 17,000 dollars. They still approved this sale and gave the buyers a clear to close and purchase this house for 90,000 dollars. Of course, there is more to a short sale than just asking the bank to take a loss. The following steps need to be performed.
1. A short sale package must be submitted to the mortgage company’s “loss mitigation” department. This package is a long list of documents including a contract, a HUD-1 settlement statement, tax returns, pay stubs, bank statements, a hardship letter explaining why the homeowners cannot afford their mortgage, and a financial sheet displaying income and expenses.
2. Once this package is completed and submitted, the mortgage company will order a BPO. This is a broker’s price opinion (or an appraisal) so the bank can verify if the offer is sufficient. The bank has the option to accept, deny or counter any offer you submit to them. Your offer not only has to be approved by the bank, but also by the investor who actually backs the loan for the bank.
3. Upon receiving an acceptance letter from the bank, they will typically give you thirty days to close the transaction and wire the funds to them.
Once completed, the short sale creates a win-win situation for everyone involved. The homeowner was able to sell a house that they were over-leveraged on (they sold for less than they owed on the house). A buyer is able to get a great deal on the property. The bank took a non-performing loan that was in default and was able to release the loan. They are now able to take that “bad debt” out of their books. It makes sense for them to lose some money in order to do this. If they had to foreclose on the loan it would cost them even more money than they just lost on this short sale.
As you can see, short sales are a pretty creative way to make sakes happen in any market.