Short Sale – Part 7 of 8
Part 7: Short Sale
Part 7 of an 8 part series -
Goal: To educate a home seller on the options when selling their home.
“What are my options?”
This is one of the most common questions I receive from home sellers, and it’s a valid question. How do you, as a home seller, expect to make an informed, intelligent selling decision without knowing all the options you have available? The short answer is you can’t. But don’t fret! The goal of this article is to clarify and explain all the options you (home seller) have when liquidating your property.
Below is an outline of the options at your disposal (in no particular order):
- Traditional Listing
- Net Listing
- Mortgage Assumption
- Cash sale (off market)
- Owner financing
- For Sale by Owner (FSBO)
- Short sale
Now that you know all eight options let’s dive into more detail describing each option and cover a few pros and cons.
7. Short sale – A short sale is a type of real estate transaction whereby the net proceeds from selling the property fall short of the debts on the property. For example; you have a 90k first mortgage and a 10k second mortgage on your property, totaling 100k, but the property is only worth 90k. When you sell the property the net proceeds (after commissions, fees, closing costs, etc.) will be about 80k which is less than what you owe (100k). Since the lien holders are taking less than the amount owed they will have to agree to the sale of the property, which can take a lot of time and documentation. Another stipulation is you will need to prove you face(d) a financial hardship that will prevent you from making future payments.
- Bank settles for less than you owe. The lien holder(s) will approve a price at which you can sell the property. You don’t have to worry about bringing money to closing to pay the remaining loan balance, which could be tens of thousands of dollars.
- Removal of obligation to pay mortgage. Typically, but not always, you (seller) would have missed a few payments already due to your hardship and not being able to make future payments. Once you are approved for a short sale, you are no longer obligated to make mortgage payments. Some short sales can take in excess of six months, meaning you can have months where you don’t have to make payments.
- Better on credit than foreclosure. A foreclosure can make it difficult to apply for future loans, leases and borrowing money in general. However, a short sale is looked at more favorably than a foreclosure. A foreclosure will stay on your credit for 5-7 years and drop your credit several hundred points while a short sale will be much less severe.
- Long process. As mentioned above, a short sale can take months. If you’re trying to sell your home quickly you’re definitely going to be in for a surprise. There is a lot of paperwork, stress and time-consuming calls and meetings.
- Damages credit. While a short sale won’t damage your credit nearly as bad as a foreclosure, it will still have a negative impact. How much a short sale will affect your credit depends on how far you are behind on your mortgage and other factors. Various sources report your credit could be affected anywhere from 60-300 points from a short sale.
- No guarantee. When you apply for a short sale there is no guarantee that it will be accepted by the lien holders, which can create a lot of stress and worry. Remember, you must show financial hardship that proves you cannot make future payments, what constitutes “hardship” is vague and varies depending on the lien holder.
Continue with Option 8 of our 8 Part series!