How Does a Short Sale Work?
Though short sales can happen at any time, they tend to be more prevalent following a period of higher-than-average sale prices. Buyers move into their new homes only to end up in a financially distressed situation later.
Rather than go through a foreclosure, they may find a buyer for a short sale. This will allow them to sell the property for less than what is owed to the lender.
Here’s how a short sale works.
What is a Short Sale?
A short sale can happen when a homeowner is struggling and cannot pay the mortgage payments. They work with the lender to sell the property for less than is owed on the mortgage. Then, once the sale goes through, all the proceeds go directly to the lender to be applied to the outstanding loan.
Although this isn’t the preferred way to sell a home, buyers and lenders can get out of this tough predicament by cutting their losses and moving forward, avoiding the foreclosure process.
Buyers looking to score a property that is in healthy condition and being sold at a great price can often find success with short sales. Though they should always do their due diligence first before making the investment.
Short Sale vs. Foreclosure
For one reason or another, there may come a time when a homeowner can no longer afford their mortgage payments. This will often send a property into foreclosure – when the lender takes legal action to seize the property back from the owner.
Before it reaches the foreclosure process, the homeowner may be able to work with the lender to sell the property as a short sale. It is important to note that there are requirements that need to be met, such as proving they are upside down in their mortgage and unable to pay. Not every struggling homeowner is able to avoid foreclosure with a short sale.
If approved for a short sale, the homeowner will find a buyer and the lender will handle reviewing offers and undergoing negotiations. In fact, the lender takes a very active role in short sales.
This is much different than just walking away from a property as in a foreclosure.
How to Buy a Short Sale
If you are a buyer looking to benefit from purchasing a property through a short sale, you must know that it is just like any other real estate transaction – except much more complex.
Obtain pre-approval for financing. First, you will need to get approached for financing. Being pre-approved shows that you have funds to follow through once an offer is made. The lender will be looking for this.
Hire a realtor. Hire a real estate agent to help you find a home that is a short sale. Make sure your realtor has experience in short sales and knows where to look to find them. This may take some time, but pre-foreclosed properties are often available.
Do your due diligence. Don’t rush to make an offer based on the information given to you. When you find a home, do your own research. Determine the home’s value and compare it to what the short sale is seeking. You will also want to know:
- How much is owed to the lender
- If the title is clear of any liens, judgments, outstanding taxes
- Whether or not there is anyone else who has a claim to the property
Make your offer. When you feel good about moving forward, make an offer. Even though they are trying to get rid of the home to avoid foreclosure, you do not want to assume that it can be sold for the cheapest price. This is especially true since the lender is trying to recover as much as they can from the loan. Your offer should be comparable to the current home value.
Invest in an inspection. You will want to invest in a home inspection just so you know what you are walking into. You will not have any wiggle room for negotiations based on what is found, but at least you will know what to expect if you proceed with purchasing the property. It is important to note that most short sales are sold as-is.
A Short Sale Closing Process
The closing process in a short sale transaction is quite tedious. As the buyer, you want to know that you are getting a property that has a free and clear title. This means having the lender and other lienholders sign over their right to the property.
The seller will need to provide documentation about these lienholders, as well as information on their financial hardship.
Because so many entities – and factors – are involved in a short sale closing, the process can take much longer than normal. And, there is never a guarantee that it won’t fall through before it closes.
Short Sales at FIT Agency
Short sales can be very beneficial but they can also be quite complex and time-consuming. Due to their nature, however, you want to ensure the transaction goes as smoothly as possible. This is why working with a highly-experienced title team is so important.
At FIT Agency, we understand what is involved in short sales and how to successfully handle them. Let us guide you through the process.
Contact us today at (732) 630-0900 to learn more.
Our goal is to treat you with personalized service by getting to know your goals and helping you to achieve success. We’ll partner with you to provide fast and accurate title and settlement services. By continuously analyzing our processes and integrating the newest technologies, we streamline our processes so you get faster turnaround times to meet your important deadlines. Start building a professional relationship with us today. Send an inquiry now.
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