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What’s a Short Sale?

shortsalesIn today’s Miami real estate market it’s impossible to not come across many foreclosures and short sales.  Although the term “short sale” was probably a buzz word a couple of years ago, I still find that I am asked to explain what a short sale is.

A short sale is simply a home that is being sold for less money than is owed to the bank holding the mortgage note.  Because the price is less than is owed to the bank, the bank will have to approve the sales price.  The purchase price will be “short” a certain amount of money, hence the term “short sale.”

Many people think that short sales are sold by banks.  This is incorrect.  A home that is being short sold is still owned by the deeded homeowner.  But because there won’t be enough proceeds to pay the full mortgage note, the bank’s approval is required.  The bank will likely write off the shortage, but this does not make them a party to the contract.  Their approval is simply a contingency to the contract.

There are many variables that get in the way of a short sale being successful.  Here are some of them:

  • Does the homeowner qualify for a short sale?  There are certain criteria which must be met in order for a bank to consider a short sale.
  • Has the foreclosure process started yet?
  • Has an auction date been set yet?
  • Is there more than one mortgage on the property?
  • Are there other liens on the property?
  • Is the home inside a homeowner’s association?
  • Are the property taxes up to date?
  • Is the person negotiating the short sale familiar with the process?

Because of these variables, it is important that you work with a Realtor who is knowledgeable about the process and won’t get in the way of the approval.  It doesn’t matter if you are the home owner or the home buyer, working with an agent who is not familiar with short sales won’t help you get a short sale closed.  I have successfully navigated many short sales and now have a team of specialists who do that for me.  We are finding that banks are actually streamlining the process and it is moving along a lot faster than it did, say two years ago.

Although things are faster now, patience is still required.  A short sale can take anywhere from an extra 30 days (absolutely best case scenario) to an extra 6 months on top of the regular time needed to close on a home purchase.  The time to close a regular, non-short sale varies, but it’s ordinarily about 15 days for a cash deal or 45 days for an FHA financed transaction.  If a property is inside an association or the loan is a conventional loan, the time frames will be different.  Bottom line, a short sale is not for someone who is in a hurry.

If you’re a buyer looking at short sales, it’s important that your agent contact the listing agent and get enough information on the short sale so you can determine if waiting around is worth your time.  The questions in the list above are some of the questions they should have answered.  If it looks unlikely that the short sale will be approved, it may be better for you to pass on one home and pursue another.

The reason this is important is because a short sale should still be treated as seriously as a regular sale.  There are many people out there today making offers on many short sales at once and not putting earnest money deposit on any of them.  While this is certainly legal, it doesn’t make for a strong offer, and can get in the way of getting the sale approved.  I counsel all my short sale sellers to consider very carefully whether to accept an offer that doesn’t have any binding money attached to it.  What reason is there for such a buyer to stick around?

Likewise, on the flip side, I also instruct my buyers to make as strong an offer as possible.  The pruchase price is not the sole factor in an offer.  There are many parts to an offer and a good deposit is likely to get a seller to take notice and perhaps even accept your offer over someone else’s.  Including a deposit does not mean that you put that money at risk.  It means you are serious about the offer you are making.

If you need more information about short sales in the Miami area, do not hesitate to contact me.

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These articles are not intended to give legal or tax advice, and you should consult your attorney or financial advisor for additional information.

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