Short Sale Questions And Answers
Over the last few weeks I have had many people ask me questions regarding short sales and the different terminology that usually goes along with it all. I thought it would be good use of all our time for me to lay out some of the more common questions with answers so they can be used as a reference. I will be happy to answer any additional questions left as comments.
Q: What Exactly is a Short Sale?
A: In very simple terms, a short sale is when a home owner sells their home for less than what they owe the bank. It's that simple. For example, if somebody owns a property that is worth $500,000 but they owe $700,000, which is quite common in today's market, the only way they could sell it would be to either come up with an additional $200,000, or to have the bank agree to a pay off $200,000 short of what they are owed. The latter would be a short sale.
Q: Does the bank own the property in a short sale?
A: No. The owner and seller of a short sale is the private individual or entity that has title to their home. If you were to sell your home as a short sale you would still be the owner, not the bank. The confusion is created because we always hear about how agents are going to send offers on to the bank, or that a short sale package will be submitted to the bank. This is because the bank does have the final say on whether or not to accept the short pay, which essentially controls your ability to sell the home. This makes sense when you consider that the property owner has no equity in the home and is asking the bank to take less money than they are owed.
However, unlike a foreclosure, which can be forced on a home owner, the bank has no right to force you into a short sale, no right to make you accept an offer from a short sale buyer, and no right to impose anything on you other than the legal foreclosure process.
Q: Is a shot sale or foreclosure worse for my credit?
A: From a pure lending standpoint, a foreclosure will be worse for you credit than a short sale. This is because a short sale is an actual agreement of terms between you and the bank to pay off your debt at a reduced amount. A foreclosure is when a borrower simply stops paying what they owe and walks away without any agreement from the lender. The foreclosure is viewed as being far less responsible than making a short sale agreement and therefore affects your credit to a far lesser extent. Having said that, there may be benefits to foreclosing vs. short selling or the other way around depending on your personal situation, which is why you really should have your personal scenario evaluated. There is no one blanket answer that works all the time.
Q: Do short sales always take months to close?
A: Short sales do not have to take forever to get done. There are a couple of key things that your real estate agent can do to make the process quicker and still take advantage of short sale prices. The biggest trick is to search only for property that has a short sale approval already in place but has come back to the market. This usually happens when a buyer has his short sale offer accepted by the seller and the offer is submitted to the bank for short sale approval. By the time the bank gets back to the buyer with an approval the buyer may not be interested in any longer or may have already purchased something else. The great part for a buyer like you is that this property now has an official approval from the bank so if you match the approval price you can get the deal done quickly.
The second thing to look for is to see what bank holds the loan. Some are much faster than others. Wachovia for instance, is the quickest in the industry today so if you find a short sale property that has their loan with Wachovia you may be able to go through the entire process in less than 40 days. However, if you find a property that is with Bank of America, who is a lot slower, and it does not already have an approval it may take you four months to close that deal. The good news is that many banks are starting to adopt the Wachovia model and the process as a whole is getting faster and easier. Your agent should be able to point you toward properties that fit these criteria. I for instance, routinely search for property that has an existing approval or has their loan with Wachovia when my clients tell me that they want to get it done quickly.
Q: Should You Hire A Lawyer?
A: This question was just recently raised in the Phoenix Real Estate Guy's Blog. The comments then go on to argue yes or no to the question. The simple answer that absolutely is the right answer is that it depends. If you feel like you need it then you should go right on ahead and hire a lawyer. Every situation is different and the truth is that sometimes you probably really do need it and other times you probably don't. It has a lot to do with the amount of assets you have that need protection. However, any real estate agent would be making a pretty big mistake to discourage their client from seeking legal advice because doing so could come back to haunt that agent. In this litigious world it is best to encourage your client's to seek as much due diligence and professional help as will make them comfortable.