A short sale is when your mortgage company agrees to allow you to sell your property for less than the amount owed on the mortgage. If your property is underwater then a short sale is one of your options.
How do short sales work?
Short sales start the same way as any other home sale: hire an agent, list the home, and find a buyer. Unlike typical property sales, however, you must also complete an application (including a hardship letter and BPO) for the short sale with your lender. Then you must negotiate with your lender and any junior lienholders to obtain an approval letter. Finally, you must vacate the property and close the deal.
Why would your lender agree to accept less than you owe on your mortgage? In short, foreclosure is expensive and unpredictable. Foreclosure costs mortgage lenders both time and money. So mortgage lenders agree to accept less than you owe to quickly dispose of the property and move it off their books.
How long does a short sale take?
Short sales are more complicated than the typical real estate transaction. The average short sale takes between four and six months. Some short sales are approved quickly — within two weeks. Most short sales take much longer, however, and can take up to two years from listing to closing.
Often the fight comes down to differences between the BPO submitted by the homeowner and the BPO generated by the bank. “BPO” stands for “broker price opinion.” It is a broker’s written opinion of the property’s market value based on a minimum of three recent similar property sales adjusted to specifics for your property. When initiating the short sale process, try to find a real estate agent who has experience with short sales.
The advantages of short sales
There are some advantages to a short sale. First and foremost, you will not have to worry about your mortgage anymore.
You will have avoided foreclosure. Either a foreclosure or a short sale will damage your credit, but as time passes, short sales are viewed more favorably by mortgage lenders. Both foreclosure and short sale will remain on your credit report for seven years. But a short sale also allows you to avoid the so-called stigma and embarrassment of foreclosure.
Second mortgages (and other junior lienholders) frequently agree to settle their liens for dramatically reduced amounts. Junior lienholder settlement payoffs are usually paid from the first mortgage short sale proceeds.
You may also qualify for funds to vacate. “Relocation incentives” encourage homeowners to be proactive in preparing the property for sale and vacating the property. Relocation incentives (sometimes called “moving money”) get paid at the closing of a short sale, not beforehand.
The downsides of short sales
Short sales typically take a long time and require patience. And mortgage lenders do not approve every short sale application. In addition, you will not receive any proceeds from the sale. And if your buyer backs out, you will have to restart the entire short sale application process.
While second mortgages can be extinguished in a short sale, these liens require an entirely different negotiation process. You must address all liens against the property prior to closing or the short sale will not close. This is a time-consuming and often frustrating process.
Importantly, applying for a short sale will not stop the foreclosure process.
And finally, short sales require doing a lot of work for the bank. You will not receive any proceeds from the sale. And all of your hard work may be for nothing if your lender declines to approve your application.
Should I short sale my property?
If your mortgage company schedules a foreclosure auction, it is too late to attempt a short sale. The short sale process takes time and should be considered early in the process post-default.
At the same time, if you intend to delever your property but intend to purchase real property in the near future, then short sale is preferable to foreclosure.
Discuss your options with an experienced foreclosure defense attorney. You have other options, too. But exploring your options sooner will increase the likelihood of an favorable outcome.