If you’re house hunting these days, chances are you’ve run into dozens of short sale listings. As a Broker, I’ve noticed quickly how little consumers really understand about the term. The common misunderstanding is that a short sale is just like a foreclosure, but it’s not nearly the same.
Short Sales help people who are underwater on their homes with minimal financial loss. For example, if homeowner Joe has a loan for $500,000 on his home, but his home is currently only worth $350,000, Joe is considered to be “underwater” on his property by $150,000. Joe is most likely selling his home because he can’t afford the monthly payments, but how can he sell it when he owes more than it’s worth? Without a short sale, his only option is foreclosure or refinancing, if allowed to.
A common option for Joe is to just stop making the payments on his home, in which case the lender can step in and foreclose on his property. Joe is kicked out and his credit will be affected for up to 7 years, making it harder for him to get credit cards, auto loans, mortgages, personal loans and even rentals. Landlords check your credit too!
Joe has another option, in which he puts his home on the market and receives market offers for his property. He then takes that fair market value offer to his lender, and he, with the help of his real estate agent will negotiate a “short sale” with the lender. In this scenario, the homeowner and the agent will make the case to the bank that the owner can no longer continue to make the monthly payments. In many cases, it may be far easier and cost the lender much less to “forgive” the $150,000 the home is “under” and let the sale take place.
For a lender, the short sale is becoming much more appealing these days. The lender is strictly concerned with his bottom line. If the homeowner is allowed to settle his debt or “short sale” with the lender, then he is very likely to leave the property in a good condition to ensure the sale takes place. If, however, the lender decides to foreclose on the home instead, the lender will have to factor in extremely costly and time-consuming foreclosure proceedings, lawyers and other expenses, only to sell the property for fair market value anyways. The other risk they take is that the homeowner, who may feel betrayed or taken advantage of, will destroy the property and cause major damage to the home upon vacating. We see this all the time from angry homeowners who were kicked out. This will in turn make it even harder for the lender to sell after foreclosing and the costs of repair are unpredictable.
The good news for a homeowner who completes a short sale is his credit will NOT be marked by a FORECLOSURE on his credit history, but rather a “debt settlement” flag. Further, in most cases, this only affects their home buying power for 2 years.
If you find yourself in this position, consider short selling your home and renting for 2 years. Prices will still be low, even if they rise a bit, prices will be very low compared to what they were in 2006’s peak, and you’ll find yourself owning another home sooner than you think.
Tags: home, real estate, san diego, short sale, underwater
