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A Winning Strategy: Short Sales

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By : Karim El Sheikh    99 or more times read
With much of the media being centered on the housing market, and the state of the economy, the term “short sale” is often used. However, many people are not aware of what a short sale actually is, and how the process works. Short sales can be a very lucrative deal for all parties involved, and when done correctly, can keep another property off of the foreclosure rolls.

To begin, when a homeowner becomes upside down in their mortgage it is impossible to sell the property. A buyer is not going to purchase a home at a cost that is more than its value. Many home owners simply stay in their homes at this point awaiting the market to rise again. In the event that the mortgage can no longer be paid, and the home must be sold, home owners often find themselves facing bankruptcy court or foreclosure as a way to handle this problem. This is where a short sale enters the picture.

A short sale is an arrangement made with the home owner, through their lender, to sell the property for less than what is owed on the mortgage. This type of sale can only be completed with the pre-approval of the lender. All of the lenders terms must be met by both the seller and the buyer before the sales are completed.

The current home owner must be able to prove to the lender that they can no longer afford to make the payments on their current mortgage and that foreclosure is imminent. The lender will require documentation of loss of income, bank accounts and any other financial records they deem necessary to prove inability to pay. Next the lender will require an appraisal of the home to determine the current fair market value. If the home has greatly depreciated, they will most likely approve a short sale.

When an offer has been made on the home the lender will most likely bargain with the potential buyer. These negotiations are separate from the seller, and the lender can choose to select the offer or decline. Offers and counteroffers can take place several times before a final selling price is agreed upon. However, lenders are currently accepting more offers than declining them in an effort to avoid having more foreclosures on their books.

Short sales are not a quick process. Buyers that are interested in making a purchase in this manner should be aware that a short sale can take several months to process. On average, a short sale takes 5 months to complete from initial offer until the closing date. If you need to move into your new home quickly, you may wish to opt for another purchasing method.

At the same time, sellers that are offering their home as a short sale must keep in mind that the process can be very long. The home owner, during this period of time, is still responsible for the payments on the mortgage. If, during that time period, the mortgage falls into arrears, there is still a possibility of a foreclosure taking place before the short sale is completed.

While it is not necessary to seek legal counsel during this type of sale, it is recommended. Often lenders will only authorize a short sale if the seller agrees to be responsible for the remaining debt on the mortgage. This is not required by law, and is often thrown in the contract as a way to recoup the loss the lender is taking. Good counsel, through a trained real estate agent or lawyer will help sellers avoid this mistake.

In the end, the seller walks away from a mortgage they could not afford with little damage to their credit. The buyer is able to purchase a home at a very reasonable cost, and the lender was able to recapture some of their money and avoid a foreclosure hearing.
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