Coming Up Short

As of Nov. 25th, 2009, the Cook County Assessor’s office has reported that Q3 2009, foreclosure filings have continued to rise, after declining in the 2nd quarter.  Distressed properties have been an increasingly common type of transaction, especially short sales, in the current market situation.  A short sale occurs when a lender agrees to a selling price that is less than the balance owed on the current mortgage.

A short sale scenario occurs prior to a property going into foreclosure, and is sometimes a more viable option as it may be more economically beneficial to sell the property for a minor loss rather than going into the foreclosure process.  A short sale can occur even if Notice of Default has not been recorded.

Lenders will need to approve the purchase contract for a short sale which is usually written as a contingency into the offer. Because of the lender approval period, a short sale generally may take longer to close versus a typical resale from an individual owner(s).

As a seller there are several factors to keep in mind.  While your lender may sometimes forgive the loan balance owed, this is part of the negotiated process with the lender.  You can be taxed on the amount forgiven as well, and should check with their attorney or accountant for qualification.  Each lender has their own policies for approving a short sale, although declining home values, inability to sell and financial hardship are major factors for most institutions.  Furthermore, there are credit score implications that will occur, although not as severe as a foreclosure.

Other types of liens, such as tax liens or mechanic’s lien on the property may not be part of the sale/negotiation with the lender and you could responsible for these amounts after closing.  You can still potentially occupy the home during this stage.  Depending on the stage of default and whether you are currently occupying the property, there are different strategies that I would advise.  I work with specialized short sale attorneys whom I recommend to help expedite the process with parties involved and to assist in negotiations with lender approval.

A short sale scenario is not always guaranteed as lenders will want to explore other options such as refinancing and recent government programs in an effort to minimize short sales/foreclosures and allow people to keep their home.

A person could possibly purchase a new home within a few years after a short sale.

As a buyer, purchasing a short sale can be a worthwhile opportunity.  There is an investment of time and money that buyers have to be prepared for.  The time for a lender to approve a short sale contract can be anywhere from a few weeks, to a few months depending on the lender and whether the property has already been approved for a short sale and the offering package.  During this time, any amounts that a you commit towards inspections, attorney  and utility costs may not be refunded (in some cases, utilities have been turned off, and prospective buyers may opt to pay fees to reinstate service in order to properly inspect mechanical equipment / appliances and other areas of the home).  Any earnest monies forwarded usually is returned upon the cancellation of a contract.

In some cases, the seller is still occupying the premises, thus there may be comfort that the home might still be maintained in some sense, and has not been broken into and/or vandalized.  However vacated premises could be just as attractive as these homes are more likely to be lender approved for a short sale – although lender approval does not guarantee the selling price or acceptance.

During the approval period, the property can remain on the market and entertain additional offers.  This may put you into a multiple offer situation.

The purchase contract for a short sale is very similar to a standard purchase contract, with additional documents that lenders may require.  Furthermore, my own practice is to create a custom offering package dependent on the situation of both the seller and which lender we will be negotiating the short sale with.

A person purchasing a short sale may enjoy some built-in equity although this value may not be immediately realized through a resale or through a line of credit.

I have represented many people through the short sale process and one of the predominant factors involved, whether as a buyer or seller is time.  Understanding how these factors relate to your situation can help lead to a successful transaction.

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Sherwin L. Sucaldito, REALTOR®
Member of The Institute of Luxury Home Marketing
Member of the Real Estate Buyer’s Agency Council, ABR
Certified Residential Property Manager, CRPM

Creative Commons LicenseComing Up Short” by Sherwin Sucaldito is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.