When talking to people a year ago, the mention of a short sale just drew a blank stare from people. Today, there has been much bandied about the Internet about short sales and it’s almost become a political thing, people have either taken a hard left or right stance on the subject based on what they’ve gleaned from the Internet and talking to co-workers.
A short sale is certainly one avenue for struggling homeowners who are attempting to avoid foreclosure. There has been a lot written about various alternatives to foreclosures this year. Options include deed-in-lieu, short sales, loan modifications, etc.
Fannie Mae recently announced a program in conjunction with deed-in-lieu that would then rent the property back to the former homeowner.
Under the Making Home Affordable program, there has been more talk about doing loan modifications, which involve modifying the terms of the exisiting loan to give borrowers a more affordable payment and allowing them to stay in their homes.
Unfortunately, loan modifications have, by in large, failed. In these cases, a short sale workout option may be the perfect alternative for the homeowner facing foreclosure or who is looking to sell their current principal residence, but can’t sell their home at the full amount owed on the mortgage due to current market conditions.
Lenders will generally consider a short sale on the property if the borrower can provide a signed contract or offer for less than the full payoff as well an appraisal or other valuation that confirms that the sales price is reasonable.
In the housing market today, this strategy is becoming more commonplace as servicers are more inclined to work with homeowners to avoid the high costs of foreclosure. It is also well accepted in the industry that the costs and/or losses incurred by the servicer if the property reverts back to them in as a foreclosure are usually greater than any reduction in payoff they may incur in a short sale. The latter remains an arms length transaction between a motivated seller and buyer and also allows the borrower to avoid foreclosure while preserving the dignity of the homeowner.
While short sales are becoming more and more prevalent, many homebuyers or Realtors may be wary of them. Unlike a traditional residential closing where lien holders receive full payoff, there is a negotiation component to short sales that may delay the process. The valuation process may return conflicting information that must be verified. However, as servicers and their partners become more familiar with the process these sorts of delays should be reduced.
In 2010, short sales will become an important option for borrowers with financial difficulties. Of course as with any real estate transaction, borrowers facing these challenges should carefully research all possible options available to them to ensure the best possible outcome.
Aaron Hofmann is a Certified Distressed Property Expert with Keller Williams in Smyrna Vinings and is available to assist with your needs. Contact him today to set up a confidential appointment.