What is a Short Sale?

reposted from John Reay & EXIT Realty Sunrise The Cape Coral Short Sale Expert

As real estate professionals, many of us assume that the general layperson understands the term “Short Sale” or as we called them in the early 90’s, “Short Pays.” We owe it to the people we serve to let them know that walking away from a home you live in is the worst mistake you can make. A foreclosure on your credit report is worth about 400 points. A Short Sale, 100 points (depending on how long it takes to sell and how many payments you miss).

Here is an example and a way to explain it to a consumer not familiar with what a Short Sale is: Assume you own a home you purchased in 2005 for $650,000. You have a first mortgage of $500,000 and a second for $150,000. In July of 2009, you lost your job or took a pay-cut at work or your adjustable rate adjusted and now the payments are out of reach, you just can’t make them anymore. I will assume in this example that your house is now worth $400,000. Keep in mind, it is very doubtful that the second mortgage will do anything except call and harass you. They have ZERO leverage with you. If they were to foreclose, they would have to pay off the first mortgage of $500,000. NO WAY they will do that and lose more money.
You can call your local Realtor (one who HAS EXPERIENCE in Short Sales) and put the home up for sale. We assume the house goes on the market for $405,000 and you get an offer for $390,000. In a nutshell and if you qualify for a Short Sale (in other words, if you have $500,000 in the bank you can forget it), the bank will consider a far market value offer. They will send an appraiser out to look at the home and get another opinion as to the value. If your Realtor did his or her homework, there will not be issues here. In this example, I get the second mortgage to take a $7,000 pay-off and they will release the second mortgage (first mortgage holder will pay this money to the second mortgage holder). The first lien holder agrees to sell at this reduced,current market value amount.

In MOST cases, they will release the homeowner from the difference (no judgement), if you have the right people representing you and you qualify.

The above EXAMPLE would put this homeowner back on their feet in less than a year. This sale cost the Seller about 100 points on his credit report. Since credit is based on “what have you done lately,” this person makes all his other payments on time for say 18 months, and he is ready to buy another house sooner than they thought! Most important, THIS WILL COST THE SELLER OF THE HOME NOTHING! The Bank or lien holder will pay your closing costs including the Realtor fees.

The worst thing you can do is just walk away from your house and do nothing. It is always my recommendation that you also include a real estate attorney to help with the process, since that attorney will usually be in a position to do the closing, most will be more than happy to help you in exchange for selecting their title company to do the closing (that is how they get paid).