Understanding Short Sales - Benefits and Negatives

Fortunately, today’s housing market conditions mean there are fewer distressed properties for sale, but they do pop up. However, in spite of a robust market, there is a possibility that post-pandemic conditions could yield distressed sales.

This isn’t a forecast, rather an opportunity to help educate buyers and sellers who are often confused about the difference between a short sale and foreclosure; common terms to describe a distressed property. Plus, with several misconceptions about the short sale process, this provides you with a better understanding of which option is right for you should you be faced with a distressed sale.

First of all, let us provide some explanations. The term “distressed” is a catchall term for any property that is not being sold in a more traditional manner. It certainly includes both short sales and foreclosures, but can also be used to describe a severely damaged property which might not be able to obtain conventional financing due to lack of livability. 

What is a foreclosure?

A foreclosure is a home that was lost by the previous owner and is now being offered for sale by the bank that held the old mortgage note. This Zillow article provides good insight into the stages of a foreclosure. Our role in a foreclosure can be in either representing the lender as the listing agent or sourcing the property for our home and investor buyers.

What is a Short Sale? 

A short sale occurs when a seller owes more than the home is worth and is asking their mortgage (lien holder) holder to accept less than they owe in the sale. The purchase price must have their lender approval. Short sales could be caused by many factors, but most commonly is a result of a rapidly declining housing market.

What is the Short Sale Process?

Firstly, HOMM Real Estate Services would suggest contacting your lender and let them know of the situation. They may even have a dedicated short sales department. Ask about their particular process. Your lender will be closely involved throughout the entire process as they will have to give approval for the final sale.

As outlined in this article written by Brian O’Connell for TheStreet.com, the short sale process can be relatively simple. Yet, there are several benefits and negatives to consider – depending on whether you are the buyer or seller.

As the seller, a short sale may be a way for homeowners to avoid foreclosure and get out from under their loan with the lender by settling.

Excerpts from Brian O’Connell’s article considers these benefits and issues for sellers of a short sale:

Benefits

1. Credit score advantages

A short sale is highly preferable from a personal credit score point of view, especially when weighed against any potential home foreclosure. Credit scoring firms take a dim view of a foreclosure, and will issue a credit score much lower than when a home seller turns to a short sale instead.

2. Emotional advantages

In many instances, a home mortgage is the biggest financial event of a person’s life – at least before retirement. The seller avoids a “worst case scenario” of foreclosure and can honestly say they sold their home and moved on with their life.

3. Saving on home sale fees

With a traditional home sale, the seller bears the burden of fees and charges, including real estate agent commissions, which can be 3%-to-6% of the total home sale. In a short sale, those fees and commission are paid by the bank.

Negatives

1. No cash-out

A short sale means they won’t earn any profit from the sale of the house – the bank or mortgage lender gets all the sale proceeds.

2. Dependence on the lender

Home sellers also need a green light from their lender on a short sale – they can’t make    that decision on their own.

3. Less cash for a future home purchase

Since the seller earns no profit on a home short sale, they won’t be able to steer home sale assets toward the purchase of a new home. Instead, they’ll be starting from scratch.

From a buyer’s perspective, it is often the lengthy time and inordinate paperwork that can deter them from moving forward from purchasing a short sale. Yet, as daunting as it may first appear, the competitive purchase price may outweigh any of the disadvantages. 

According to the article here are excerpts of the home buyer’s benefits and negatives to a short sale:

Benefits

1. Reduced price

Primarily, the big benefit is the increased odds of getting the home for a reduced price… …As any real estate agent will say, a motivated seller is a seller who wants to cut a deal, so a low-ball offer has a better chance of being accepted in a short sale than in a traditional home sale negotiation.

2. Less competition

Many home buyers, especially first-time buyers not used to the complexities of the process, may not want to get involved with a short sale.

Negatives

1. A longer home-purchase timetable

For buyers, the paperwork process is significantly longer in a short sale…and that may be a deal-breaker for home buyers.

2. Lender interference 

Lenders may also get directly involved in the home price negotiations, often asking for a higher sales price than the home seller (including the insistence that the buyer make all or most of the closing fees), in order to recoup more money on the home loan.

3. The property may be in disrepair 

It’s also highly advisable for a short sale buyer to work with a real estate agent well-experienced in the short sale process. It’s also strongly advised that a short sale buyer hire a home inspection professional to thoroughly examine the property, as short sellers may not have the financial resources to keep up with home maintenance and repairs.

Bottom Line

Buying or selling a short sale property takes a little longer, but there are benefits and it is far less difficult than it used to be; most especially if you partner with an experienced local agent who is familiar with the process.

HOMM Real Estate Services, located in the Brandon, Florida area of Tampa-Bay focused to Hillsborough, Pasco and Polk Counties. As a full-service general real estate company, we specialize in general real estate, home buyers, home sellers, new home construction, rentals, tenants and landlords and property management.

Learn more about Marie Negron, her team and HOMM Real Estate Services. Call 813-684-5954 or email info.hommsales@gmail.com to get started.