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What is a short sale? When
the owner of a property owes more on the mortgage than the property
is worth and can't make up the difference, the mortgage holder must
agree to take less than is owed in order for the owner to sell the
property. This is called a short sale. If foreclosure proceedings
have already been started but not yet completed, a short sale can
also be a pre-foreclosure. That means it is not yet owned by the
bank, but the foreclosure process has been started.
Who actually makes the
decision to approve a short sale? Sellers are not allowed to
profit in any way from a short sale transaction. So the seller
really don’t care what he/she sells the home for. Surprisingly
enough, the seller's lender, who is probably only servicing the
loan, doesn’t care either. The servicing bank merely collects the
appropriate documents and presents the entire file to the investor
who is actually holding the note and is owed the money. So the
investor is the only one who cares how much the sales price is. And
each note has a different investor. Literally, you could have two
identical homes with two identical cash offers being serviced by the
same bank, and yet one will get approved and the other will not. It
is entirely up to the investor holding the note how much, if any,
loss they are willing to take.
Why do short sales
normally take such a long time? Servicing banks (like Bank of
America, Wells Fargo, Chase, etc.) make money by collecting monthly
payments on mortgages notes on behalf of the note investor. As soon
as the borrower stops paying on the note, the servicing bank stops
making money. The bank then has little monetary incentive to hire a
large number of employees or install the necessary infrastructure
(computers, faxes, etc.) necessary to complete thousands of
complicated files. Often minimum wage employees will quit in the
middle of a file, so the next person hired has to start all over
again. On top of that, once a file is finally completed, it must be
presented to the note holder. If the note holder is a large
institution like a major insurance company, it can take a long while
to sign off on a substantial loss. It can literally take three to
four months to get any sort of an answer back on from the bank on a
short sale.
Why do most short sales fail? Most short
sales fail simply because of the time it takes to find out from the
bank if they are approved. Even the most serious buyer can become
fidgety after a month or two (or more) of waiting to hear something,
anything. That is why it is crucial for the seller's agent to give
weekly updates to the buyer’s agent, even if there is nothing new to
report. Just a steady stream of communication can keep a deal alive.
The second most common reason short sales fail is the difference in
appraisal values between the short sale bank and the buyer’s lender.
Again, a strong listing agent can go a long way toward documenting
reasons for a lower sales price, though again this is ultimately the
decision of the investor and sometimes those decisions seem to make
no sense at all! But it is quite common to see the same property go
into escrow several times before a successful closing. There is
nothing wrong with the property itself, just the process.
That is why it is vital that the seller, the
buyer and the agents all remain calm and be willing to jump through
many hoops to a successful close. Guaranteed, there will be many
hoops! But the patient buyer can get a great deal and the seller can
walk away with a clean slate, and that is what makes it all
worthwhile for both parties.
Foreclosures vs
Short Sales
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