Mar 28 '09, 11:04 PMShort sale is a topic that has created a big time career for a good number of real estate investors. It has also been used to save lots of homeowner out of their real estate dilemma.
Short sale in Real Estate is often mixed up together with short sale in Wall Street which describes the borrowing of stock to sell in order to buy back in the future. I wish I can explain real estate short sale is such a simple sentence or paragraph. I noticed that whenever I tried to define short sale, there is always subsequent questions no matter how plain and simple the definition is.
Well, real estate is complicated; therefore I cannot blame anyone that cannot get the meaning of pre-foreclosure short sale. Trying to define short sale is like trying to define a college major like Computer Engineering. You cannot define short sale like as in Computer Engineering is the study of something": short sale is not a study. Short sale is a process that comprises of processes and to define it, it will be vital to break the definition down to the different processes and its purpose.
A Short sale is an agreement between a mortgagor (the seller of a pre-foreclosure property) and the mortgagee (the mortgage lender). The purpose of a short sale workout is to simply cut loses of both parties in a declining real estate market.
In a declining real estate market, both parties, 99 times out of 100 incur losses. A homeowner is automatically at a loss because the home, which is considered an asset in their financial statement, is declining in value. However, it is not considered a loss to the mortgage lender until a homeowner stops their mortgage payments. The mortgage lender is in the business for the monthly interest payment.
Most mortgage notes stipulate that the principal balance does not have to be fully recouped until 30 years unless of course there is a problem making interest on the investment monthly. By the way, short sale can be defined as a loss too.
There are many reasons why a homeowner may stop making mortgage payments. The most common are financial hardships; these days, it may be because stopping is a requirement for short sale. When payment stops, the bank start losing money too and now have what is referred to as non-performing asset in their portfolio. The non-performing portfolio is the mortgage note. The bank start the foreclosure process and the mortgage note is now said to be in pre-foreclosure.
The time length of pre-foreclosure varies from state to state. It takes several months in most states. These are several months of accruing arrears of late payments, several months of bad credit ratings for the homeowner etc. It is also several months of losses for the lender. Several foreclosure proceeding and legal costs are also incurred. The lenders do not like losses just like any other business. Good news is that it is also several months to negotiate a short sale.
Short sale is one of the many work out strategies available. It is only feasible if a homeowner determines or decides early enough in the pre-foreclosure stage to sell because they cannot afford the home. If the mortgage principal balance is more than the present fair market value of the home, then someone needs to contribute towards the sale in order to make the transaction work.
Here is an example...Mr. A purchased a home in 2 years ago with a mortgage loan mount of $225,000. Six months into the new homeowner journey, he lost his job and therefore could not afford his $2000 monthly mortgage payment any longer. The mortgage principal balance left to payoff in full is $221,000. Mr. A is now facing foreclosure as the mortgage is now in the pre-foreclosure stages.
Due to the declining real estate market, the home's fair market value is not $150,000. This means the best offer coming from selling the property is $150,000. In order to satisfy the $221,000 mortgage lien on the property, Mr. A needs to contribute $71,000 or the lender needs to forgive Mr. A an amount of $71,000. The process involved in getting the lender to forgive the remaining balance is called a Short Sale.
Since, the homeowner in most cases has no money; the best a lender can get from them is to file a judgment against the homeowner after foreclosing. A judgment has almost no chances of becoming cash ever. Therefore a lender would consider a short sale in order to cut losses and move proceeds to another investment. Time is money to lenders; therefore the earlier they get the amount equal or close to the fair market value, the better.
Short sale is the process of getting a lender to accept less than the principal balance of a mortgage note in order to release the corresponding lien from the corresponding property during sale of the said property.
About the Author
Tux Lawrence is a NJ Based Web Business and Real Estate Consultant. He has been in business for about 5 year.
