"Short sale" isn't the four-letter word it once was.
By now you’ve most likely been affected or know someone affected by a short sale.
Whether you are in process of negotiating a short sale with the bank, considering purchasing one or know someone who has, the topic is inescapable. I remember a few years back when short sales were far less commonplace and had a terrible reputation. Having dealt with hundreds of distressed properties myself, I can attest to the anxiety the mere mention of a short sale can create.
Times however, they are a changin’. “Short sale” isn’t the four-letter word it once was. Let’s debunk three of the most-common myths as they relate to the short sale process:
1) Foreclosures and short sales are the same.
This one couldn’t be farther from the truth. For one, the consequences of a foreclosure versus a short sale are vastly different for the borrower. A foreclosure may lower credit scores about 200 to 300 points and usually impacts said score up to three years. Short sales are normally reported to credit bureaus “paid as agreed” or “paid as negotiated,” and as such may only lower the borrowers score as little as 50 points (if all other financial obligations are made on time). Having a foreclosure in their recent history will prevent a borrower from obtaining a Fannie Mae-backed loan for up to seven years, as well as negatively impact financing rates for the same period of time. A borrower who completes a short sale can be eligible for an FHA loan in as few as three years. More good news — if handled properly, a short sale’s impact on the borrower’s credit may be as brief as 18 months. One of the most important differences pertains to deficiency judgments. In all foreclosures, the bank has the right to pursue the borrower for a deficiency judgment. In some successful short sales, the deficiency judgment can be waived, leaving the borrower with a clean slate, so to speak.
2) If I offer asking price on a short sale, I can buy it.
Yes and no. Depends on whether the short sale has been approved. Some banks actively seek out eligible homeowners to participate in what are called “cooperative short sales.” In these cases the banks agree to allow the owners to complete a short sale, almost no questions asked. Homeowners don’t need to show tax returns, bank statements or pay stubs, and often are given monetary relocation assistance. So in these cases the banks have agreed to a price they will sell the home for. If you are looking at an online short sale listing you will likely see “price approved” somewhere in the remarks. Other times, due to the length of the negotiations in some short sales, buyers may grow weary of waiting right as the lender approves a price. In that instance, the listing may be placed as active again and other buyers will have the opportunity to piggyback on the previous negotiations. So, the listing price may or may not represent a figure you can actually buy the home for. Each case is different, so ask!
3) I’m interested in a short sale. Because the property is distressed, I can offer significantly below market value, and the bank will take it.
Probably not, unless the home needs major work. In the short sale process the banks will likely obtain more than one opinion of value both from Realtors as well as appraisers. The price the bank will approve in the end will likely fall in line with market value of similar homes that have sold in the immediate area. If you want to figure out a fair offer to submit, check similar sold homes in the same neighborhood within the past three to six months. If none exist, try the surrounding area up to a mile from the home. Look for homes that are within five to 10 years of the property-in-question’s age, and with the same bed/bath count as well as square footage and comparable features. The bank will base what price they approve for a short sale on that data, as well as the condition of the home.
Ultimately short sales have come a long way in the past few years. Many lenders have made streamlining and reforming the way they handle these sales a main focus. As a result, both buyers and sellers may want to reconsider them as options. In the end, just like people, each one is different, and it pays to keep an open mind.
Christina Rordam is a local Realtor. Contact her at 407-928-8294 or www.ChristinaSellsOrlando.com