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Real Estate

Short Selling: Getting Into the Action

A short sale is one in which the property has not yet been formally foreclosed on, but the lenders have agreed to take less than what is owed on the loans in order to obtain a payment on the balance due.

Lenders generally allow a short sale to avoid foreclosure because they believe it will result in less financial loss than foreclosure, plus it is generally faster and less expensive than foreclosure. For the property owner, the advantages include avoiding foreclosure on their credit history.

Think of it this way. A short sale is negotiated with lien holders (usually on real estate) for less than what is owed to them, or less than the full amount of the debt, and is usually foreclosed on to avoid real estate foreclosure.

Why do mortgages reach this stage?

It’s because the owners get in trouble. For one reason or another, homeowners are beginning to drown, and lenders have discovered that they can minimize their bad loan losses by selling the property before they have to go through the formal foreclosure process.

Why are there so many?

Due to the combination of falling home prices and low down-payment financed properties, many homeowners simply owe more on their properties than they are currently worth. Others who must sell for other reasons (relocation, etc.) are simply in the middle of a bad market.

Either way, when the property owner simply cannot come up with the cash, the property owner’s pain becomes the lender’s problem, and the lender’s options are to accept a short sale and forgive the unpaid debt, or foreclose on the house and pay it back. -sell it. Remember, the lender can make that decision, not the seller. It makes sense that lenders hoping to avoid more foreclosures on the books would take this alternative.

Sell ​​your property

If you want to sell your property in a short sale, you may need to submit a wide range of documentation to the lender.

  • call the lender You may have to make numerous calls before you find the person responsible for handling short sales. Make sure you talk to someone capable of making a decision.
  • Letter of Authorization This gives the lender written authorization to speak with specific interested parties, such as a real estate agent, closing agent, title company, or attorney about your loan.
  • preliminary net sheet This is an estimated closing statement that shows the sale price you expect to receive and all costs of sale, unpaid loan balances, outstanding payments, and late fees, including real estate commissions, if applicable.
  • hardship card Describe how you got into the financial bind and ask the lender to accept less than full payment. Be honest. Lenders are not particularly sympathetic to situations involving dishonest or criminal conduct.
  • Proof of Income and Assets Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate, or anything of tangible value and you really can’t pay any of the debts you’re forgiving. Include copies of bank statements.
  • Comparative market analysis This can be particularly helpful if, in fact, your real estate market has declined and property values ​​have fallen. Ask a real estate agent to prepare you for a comparative market analysis (CMA).

Buying a property

If you decide to buy a rental property in a short sale, you will negotiate with the owner subject to the lender’s approval. So keep in mind that while the landlord may not be overly concerned with the price you offer (the bank will take it all anyway) and may gladly accept your offer, the bank may reject it.

So here are a couple of things you might want to include for the lender along with your copy of the purchase contract and good faith deposit.

  • A short biography of you and your real estate knowledge
  • A complete financial package for you and two years of tax returns
  • A prequalification letter from a reputable lender
  • A strong statement of why the lender should accept your offer

It’s not a slam dunk

If all goes well, the lender will approve your short sale and, as part of the negotiation, you may even ask that the lender not report adverse credit to the credit reporting agencies (although the lender is not required to agree to this request). ).

But it’s not a slam dunk.

Many things can derail a short sale. For example, although lenders lose a lot of money when they foreclose, paying for private mortgage insurance could reduce that loss enough for the lender to choose foreclosure. Additionally, lenders who hold second mortgages, such as home equity lines of credit, may also kill off the sale. Second mortgage lenders are supposed to be at the bottom of the line to collect loan payments, but they may reject a proposed short sale if they don’t think they’re getting enough from it.

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