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Where Short Sales Stumble


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By Elizabeth Razzi
Sunday, June 15, 2008

Here's what's really happening with short sales: All too often, they fall short of the finish line.

A short sale means a sale that falls short of the amount owed on the mortgage. They happen only when the seller can't come up with the cash to pay off the difference. Most important, though, is that they can happen only when the lender agrees to accept the shrunken payoff.

Desperate sellers pursue them to avoid a foreclosure, which would be even more damaging to their credit history. Buyers pursue them in hope of snagging a home at a deep discount.

Before you waste your time, and possibly your money, on a short sale that stands little chance of getting the bank's approval, gather some intelligence about the sellers, their financial situation and the real estate agent they have hired. You will save a lot of frustration by focusing only on deals the bank is willing to make.

Lenders aren't in the business of accepting less than they are owed, and their paperwork machinery isn't even set up to work that way efficiently. Their approval of a short sale is always slow in coming -- if it ever comes at all. You need to find out if the bank even has a clue that the seller is trying for such a deal.

Too often, sellers and their agents are calling a listing a "short sale" or saying that "offers are subject to third-party review" without even having talked with the lender. They plan to get a live fish on the hook before they try to tempt the lender.

Do you want to be that fish?

It's important to distinguish between "upside-down" sellers and short sales. If sellers are upside-down on their loan, owing more than the home is worth, they are still expected to make monthly payments. Even if they would like to move, most upside-down owners are stuck until prices recover enough to make a sale profitable.

If an upside-down owner must sell, even at the reduced price, he's expected to take money out of savings, cash in the 401(k), borrow from the in-laws or otherwise pay off the mortgage.

But what happens when the homeowner simply cannot come up with the cash? At this point, the homeowner's pain becomes the lender's problem. The lender's options are either to agree to a short sale and forgive the unpaid debt, or to foreclose on the home and re-sell it. Remember, the lender gets to make that choice, not the seller.

There are lots of things that can derail a short sale. For example, although lenders lose a lot of money when they foreclose, the payout from private mortgage insurance could reduce that loss enough to make the lender choose foreclosure.

Lenders holding second mortgages, such as home-equity lines of credit, can also kill the sale. Second-mortgage lenders are supposed to be at the back of the line to collect loan payoffs, but they can nix a proposed short sale if they don't think they're getting enough out of it.


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