Though they might be less popular between 2008 and 2012, short sales are still on the homebuying scene. An unprecedented number of events may lead to financial anguish and inability to finance your mortgage. This is where short sales come in.
This article seeks to explain the parties that benefit from short sales. But first, let’s look at what a short sale is and how they work.
What Is A Short Sale?
A short sale is when a homeowner, who’s in financial distress, sells their house for an amount less than the mortgage they owe their lender. The buyer who agrees to purchase the property becomes a third-party, and the revenue generated from the sale goes to the lender. This means that the seller doesn’t receive the funds.
For example, let’s paint a scenario where a homeowner has USD$150,000 on the mortgage. The owner can decide to sell the house through a short sale for USD$120,000. In this scenario, USD$30,000 is considered as the difference. The difference is exclusive of closing costs and any other costs associated with the sale.
Because the money is usually not enough to pay off the mortgage loan, the lender can choose to forgive the difference or get the seller to somehow make up for part or all of the difference. In some states, the lender must forgive the seller in a short sale.
For a short sale to succeed, the lender holding the mortgage has to approve the short sale process by signing off the decision to allow the execution of the short sale.
Benefits of a Short Sale to the Buyer
1. Low Price
Short sales usually provide buyers with below the market sale prices and at deep discounts. If the lender would choose to evict the owner and sell the house themselves, they’ll have to cover for the eviction and administrative costs. After the eviction, the lender would then have to pay for any repairs and maintenance fees as they wait to find a buyer. All these factors would push the asking price much higher.
To avoid such expenses, lenders will agree for the short sale to take place. This means that buyers will have a chance to purchase a house at a cost they would otherwise be unable to meet. In most cases, after a short sale, the buyer will be responsible for any repairs and maintenance. Still, the buyer is able to score a remarkable purchasing price.
2. Conducive Payment Terms
Short sales are usually a perfect opportunity for the lender to cut costs and get back money that’s being lent to the house owner. For them to agree on a short sale, the seller is primarily behind on mortgage payments. The lender knows that the house owner is most probably unable to continue repaying. So, instead of continuing to receive nothing from the mortgage, a short sale gives them the best option. This helps them at least recover a fraction from the loan.
Lenders offer buyers favorable financing terms, rather than continue losing money. Such terms may include low-interest rates.
3. Empty Unit
On a property with a current tenant, the plan for handing over after the sale should be straightforward and clear. A short sale usually stipulates that the seller should have vacated the premises by the time of closing the deal.
Because they’ve proven their inability to pay, don’t consider renting the house back to the seller. Also, houses on short sale tend to involve a lot of repairs. No tenant will be able to put up with the construction going on.
Benefits of a Short Sale to the Seller
1. Protect Your Credit
Lenders would rather recoup a portion of the loan, rather than suffer a total loss. Sometimes, the lender will understand the seller’s hardship, such as the closure of business or divorce. Because the proceeds from the short sale go directly to the lender, it takes off the burden from the seller and doesn’t negatively affect their credit.
2. The Lender Might Forgive the Difference
A short sale can help significantly reduce the amount the lender is looking to recover from the loan. In most cases, the lender is less likely to come for the difference. You might also have a meeting with the bank and convince them to waive it.
3. Control the Sale
In a short sale, the homeowner is in control of paperwork, meetings, and negotiations. The seller plays an active role during the sale process. The process is more similar to that of a traditional sale.
Short sales allow homeowners in financial distress to sell their homes for less the amount owed on the mortgage. The proceeds from short sales go directly to the lender and cover for debt. Short sales offer various benefits to the seller, lender, and buyer.