Defining A Short Sale
Short sales by their very nature are not simple, but the more you know the better advantage you have. First lets define what a short sale is. A short sale is when the bank or investor of a mortgage loan stands to receive less then what is owed to them at payoff. There are so many scenarios that it is near impossible to define every situation where a short sale would be involved. The easiest and most basic of situations may look like this example:
$100,000 – Original loan amount given on the property by ABC Mortgage* amp; the current payoff of that loan.
$75,000 – Current market value of the property
$25,000 – Amount short of what is owed on property
So basically what happens is that the owner of the property would either have to pay an extra $25,000 to get out of the property or stop making payments and let the bank foreclose on the property. Now foreclosing may or may not be the best option for the lender. This is because it is very expensive to foreclose on a property. I have heard numbers thrown around of anywhere from $40,000 – $50,000 on average. So based off of that comparison a $25,000 loss to the lender is potentially better than a $40,000 loss. If there was an offer on the table for $75,000 than the lender may look at it and approve a short sale.
To add to the complexity of a short sale are lien holders. A lien holder is basically a person or entity that has put a lien against the property for money owed. There are many types of lien holders and many reasons for which they may be owed money. For example, generally the primary lender is the 1st lien holder, meaning they are 1st in line to receive any monies recieved from the disbursement of the property.
In recent history a big portion of the loans made were 80/20 loans meaning the primary lender would lend 80% of the money and the secondary lender would lend 20% of the money. Now the secondary lender would be placed in 2nd lien holder position on the loan. The reason this begins to muddy the water on a short sale is because now you have to negotiate with both lenders to sell the property. I have seen many situations where the 1st lien holder approves the short sale and will only pay the 2nd lien holder $1,000 maximum, no matter what is owed. Well the 2nd lien holder has to approve of this to get the property sold, but honestly the 2nd lien holder is happy to get just about anything. If they feel they can get more foreclosing on the property then they can force a foreclosure.
Buyers Tip: If you experience a problem wih secondary lien holders, depending upon how good of a deal you may be getting, it may be appropriate to offer them more money at closing on top of what the primary lien holder will allow. So at closing you would pay out of pocket to make the deal happen. This won’t work in all cicumstances but it is a work around when the deal comes to a halt.
An Emotional Transaction
Buying a home can be a very emotional experience. Selling a home for short or looking down the barrel of foreclosure can be a very emotional experience. Lenders are not emotional entities. They care about the numbers and that is all. This is important to remember because they do not make their decisions based upon your personal sitution or what you want. It all comes down to the numbers and this is why I think its very important to use someone with knowledge of these transactions, instead of trying to do it yourself.
I do however think its important to do your research and know what you may be getting into whether selling or buying. Be an informed consumer, but know when to ask for help.
Short sales are very complex transactions with a lot involved. The information given here is literally the tip of the iceberg, but is a start. My hope for this article is that it gives a better basic understanding of a short sale to the average buyer/seller out there. Please stay tuned for more posts regarding this and other real estate related topics from me. Thanks for reading!!
Bryan Maynes – Utah Realtor
Dwellings Real Estate
*Does not designate an actual mortgage company, just used for example purposes.
**This article is not intended as legal advice. Situations will vary state to state and lender to lender. Please look for professional help in either the form of legal counsel and/or a local real estate agent. This is intended for informational purposes only.