We hear quite a bit today about homes selling in “short sales.” But just what is a short sale, and how can a prospective home buyer buy a home that is subject to a short sale?
A short sale occurs when a homeowner agrees to sell his home to an independent, third-party buyer for less than the outstanding balance on his mortgage. In other words, the net sales proceeds from his sale still leave the homeowner “short” in paying off his mortgage.
This is often referred to as being “underwater” or being “upside-down” on his mortgage. In such a circumstance, the seller has to bring cash to the settlement table and/or the seller’s bank accepts less than it is owed in order to release its lien on the home. The bank’s other alternative is to foreclose on the property, which is time-consuming and expensive and often results in the bank’s reacquiring the vacant property.
The release of lien is essential for the new buyer to obtain clear title to the home. While the release allows the home to be sold, it does not necessarily relieve the seller from his obligation to pay any deficiency. A short seller has to separately negotiate and obtain no-deficiency language in writing from his lender. If a short seller has more than one mortgage, all lenders will need to approve the short sale.
From the short sale home buyer’s perspective, this third-party (lender) approval process is the major difference between a short sale and a regular sale. The short-sale home-buying process begins in the same manner as any other purchase: locating a home, determining a proposed offer price and preparing a written purchase offer.
Typically, the contract will be contingent on obtaining financing and the home being appraised for at least the agreed-upon contract price. Of course, the contract will also be contingent on the seller’s obtaining lender approval. Since the seller in a short sale is not allowed by his lender to receive any money from the proceeds of the short sale, he may not be that concerned with the purchase price. However, since his lender may come after him for a the difference between the sale price and what he owes the bank, he does have some incentive to accept the offer that generates the highest net sales proceeds to his lender.
In addition to receiving a copy of the fully signed and ratified contract, the seller’s lender will also want to know what the fair market value of the home is. Savvy real estate agents assisting short-sale buyers or sellers will prepare a comparative market analysis showing the market value of the surrounding homes that are comparable and that have sold. This analysis will demonstrate why the short-sale offer is a good price and why the lender should approve it.
Lenders will typically also obtain their own opinion from an independent real estate agent. The lender will also insist that the seller provide all of his financial materials, just as if he were applying for a new loan. That way the lender can determine if the seller is capable of bringing any money to the settlement table.