In the U.S., 25,833 properties are subject to a foreclosure filing as of February 2022. Experts believe that there will be double-digit increases through the fall of 2022, at the least.
No one wants a foreclosure, but unfortunately, some people are in a place with little other option except one. People in this situation often ask, “What is a short sale?”
While a short sale has its positives and negatives, it is better than a foreclosure. If you face this situation, a short sale may be your saving grace. How?
All your questions will have answers right now in this article. Keep reading for more guidance.
What is a Short Sale?
This is a transaction in which a homeowner is allowed to sell their home for less than what they owe because the bank approves it. The homeowner (and borrower) will find an agent who helps them place their property on the market for a discounted price tag. Usually, this is a discount that is substantial.
With a short sale, lenders hope that the sale will recoup most of what the homeowner owes them. It helps the lender, too, because it eliminates the expense of a foreclosure suit. Plus, there can be a long-term cost for owning a foreclosed home that may be hard to sell, like a fixer-upper.
The short sale will not absolve a homeowner/borrower from their mortgage debt, but it avoids foreclosure, which can be a long, draining process. Short sales are typically a quicker, easier solution.
Protecting Your Credit
The way that your lender sees it, they would rather recover some of the mortgage loans than incur a much bigger loss. That is why a bank will usually settle for a short sale. Together, the homeowner and the lender are in a better position in the end.
A homeowner may have a concern that the bank will pursue the loss for a deficiency judgment against them after the foreclosure is over. A bank could sue the borrower to recover their loss, the difference in what they paid and how much the loan is.
Just like foreclosure, a deficiency judgment appears on your credit report. It has a negative impact on your credit, too. However, the litigation process can be lengthy and costly, which is why the bank usually opts to cut its losses.
To qualify for a short sale, you would need to provide evidence of a hardship, such as loss of income or a divorce. The reduction of money owed eases the burden for the homeowner in the end. Plus, it does not add irreparable damage to their credit.
Preventing Foreclosure
Foreclosures hurt you in more ways than one. Also, it hurts the lender and hurts the housing market.
The negative impact on your credit from a foreclosure can make it virtually impossible to borrow money for another mortgage. A potential lender can deny even a car loan or other major purchase.
Banks and lenders can obliterate a homeowner who forecloses on their home from a pool of people who can make large purchases. This harms the economy besides just the homeowner.
Banks almost always lose dollars from a foreclosure. They lose on the mortgage payoff amount, with a lower sale price at the auction. Not only that but there are also resources they need to pay to administer a foreclosure process.
Typically speaking, banks rarely come out ahead in a foreclosure.
If you see a comparative market analysis for a neighborhood after a foreclosure happens within it, you see it hurts the housing market as well, decreasing home values in that area.
You find that when a home faces foreclosure; it is possible that it is not well-maintained either. The other homes in the area suffer as that location seems to be viewed as a fixer-upper neighborhood by buyers. So, houses in that area stay on the market for a longer period.
When you are dealing with a fixer-upper as the buyer, and you want to upgrade eventually to something more expensive, it can be much more challenging in the long run.
Put simply, it is in everyone’s best interest to avoid a foreclosure.
Save Money from a Foreclosure
While you may not realize it, foreclosures can be costly for a homeowner too, not just the bank. The U.S. Congress Joint Economic Committee reveals that the average legal cost to the homeowner for foreclosure is approximately $7,500. Besides this, there are other costs that accumulate during a lengthy foreclosure process.
This can be just the tip of the iceberg. If the homeowner cannot make payments on the additional burdensome costs, bankruptcy can be in the future. While bankruptcy has significant implications associated with it, the challenges that come from foreclosure may leave the borrower with no other option at this point.
Keep in mind that in a case of a foreclosure, a mortgage lender will not always file a deficiency judgment. Every situation is unique. If the bank feels they cannot win back the money you owe them for the property, it is not worth pursuing.
However, if all sides agree that a short sale is a better option, and there is a new buyer who is in a better financial state that can absorb some of the mortgage payoff amounts, this is the best-case scenario. It eases the hardship for the homeowner.
Also, for the bank, a short sale can make a dramatic reduction of what the bank hopes to recoup from a homeowner.
Helps Your Lender
It is not just the homeowner who incurs a negative impact from a foreclosure; the lender is negatively affected, too. There is the additional cost and time spent between notices, warnings, and legal filings. It takes time and money to attend hearings and draft documents.
That is why a lender may want to recover more than just the foreclosure but recoup their legal costs, too. Not only that, but the lender spends time and money to sell a property, which is another burden.
Lenders dislike foreclosures, and they wish to avoid them, too.
When a lender opts for a short sale, they can recover some of the mortgage payoff amounts. This reduces loss and does not require the extensive legal process they must take for a foreclosure. Often, the short sale will reduce the losses for the lender so much that it is better for them to write it off than sue the former homeowner.
Short Sales Benefit the Housing Market
The cold reality that can be hard to swallow is that homeowners can spend many years building equity on their property. But then a housing crisis hits, and they watch their equity vanish before their eyes.
When a comparative market analysis finds that a housing market is saturated with homes that are underpriced because of foreclosures, it can be challenging for people of the community to find a home buyer. Neighborhoods with multiple homes that are foreclosed upon will find a drop in the property values. While once a vibrant area to live in, this kind of neighborhood will become saddened by empty homes that are owned by the bank.
Short sales help to keep neighborhoods intact with affordable prices. It can reduce how many excess homes there are and reduce possible fixer-uppers, which can also hurt the housing market.
Opportunities for Agents
Short sales are less complex than foreclosures for a real estate agent. However, they are more complicated than traditional home sales. Overall, the benefits of working with short sales are good for the agent.
It can be a profitable niche market for a real estate agent. Although they must have a thorough understanding of the process. If an agent can capitalize on an increase in short sales, they can stand out among competitors.
Also, if the housing market is slow, this can represent an additional source of business and income. There is an increase in specialized short-sale training available for real estate agents. Learning about short sales can pay large dividends to an agent for their career.
Benefiting Investors
No investment is ever certain. There is always a bit of risk, but a savvy investor can bode well with short sales, while also helping a struggling homeowner. It is helpful in a few ways.
Investors can capitalize on below-market pricing, and then they can sell the property competitively. Not only that, but the investor can access information about the home more easily than they could with a foreclosure.
Further, someone who invests in short sales has wiggle room to work out a deal with the homeowner. This could include renting it back to the homeowner. They can also create a feasible plan for giving the homeowner an opportunity to rebuild their credit.
Homeowners Have More Control
There is a lot of stress for a homeowner once the foreclosure process begins. Confusing documents arrive in the mailbox, along with scary demand letters. Then, the lender’s legal team will intercede.
Short sales give the homeowners more of a sense of control because there are options, not demands, being sent by mail and by phone. They can meet on better terms and negotiate on paperwork. The process is a lot like a traditional sale, preventing the tremendous pressure that is synonymous with a dreaded foreclosure.
There is stress involved anytime you sell a home. At least the homeowner can play an active role. Mainly, they deal with real estate agents, buyers, and banks.
In general, short sales are manageable, whereas, with a foreclosure, you are stuck.
Avoid Scams
The thought alone of facing a foreclosure can be more than some people can bear. They feel disheartened and hopeless. If this wasn’t bad enough, there are dishonest scammerslooking to take advantage of an already vulnerable homeowner.
There have been plenty of real-life fraudulent cases which you may have read about in the news over the last ten years. They can be scammers with catchy slogans and money-back guarantees. They claim they will “save homes” from foreclosure while gaining access to the funds of the homeowners.
Homeowners end up with no relief from foreclosure and owing even more money resulting from such fraudulent deals. Short sales take away opportunities for scam artists to slither their way in for a profit and prey on victims.
Peace of Mind
While foreclosures are terribly stressful, all real estate deals carry some level of stress. That said, a short sale does not carry the same weight of stress as that you feel with a foreclosure.
With a short sale, you prevent:
- A major hit to your credit
- Long drawn-out legal procedures
- The overall stigma that accompanies a foreclosure
Short sales are not risk-free, however. There is a negative impact on your credit. Plus, it will not completely erase any financial implications if a homeowner cannot take care of the mortgage payoff amount themselves.
What a short sale does is open doors to solutions. It takes away the legal action that is associated with a foreclosure. It can lessen the financial burden and salvage one’s credit (to a degree).
Short sales can help a homeowner be in a more positive place after the transaction is complete. In fact, you may finally see some light shining in when you have found yourself left in such a dark place.
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Have you been asking, “What is a short sale?” If so, it is time you learned more about the options that are available to you. Reach out to us right now and let’s discuss solutions for your property.