The U.S. is facing a foreclosure crisis. We are about to enter into a commercial property crisis as businesses can’t afford monthly rents. But, for the newbies out there, let’s just stick with residential property in this discussion.
Did you know homeowners do not always have to go through foreclosure when problems arise?
Many investors and individual home owners around the country are now working with Realtors to learn how to do short sales. A Short Sale is simply a way to prevent a home from going through foreclosure. When lenders and banks are distressed due to rising numbers of foreclosures, they invariably become open to taking alternatives to foreclosures. Banks are in the business of selling money. They do not want to own houses they repo’d due to foreclosure. So it is in their best interest to allow more short sales to clear their books.
According to Wikipedia, a short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the homeowner. Let me simplify this for you: You can’t pay the current mortgage, so you sell the house for less than the current mortgage amount to just get out from under it. The banks lose the original amount, but at least they get cash.
Generally, the mortgage company’s loss mitigation or “workout” department handles this transaction. And often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are other costs banks incur that are associated with a foreclosure. This is a good option if you are having current troubles with a home mortgage, or you wish to purchase a distressed home from someone who is on the verge of foreclosure. (The rich get richer, right?)
If you are a real estate professional or investor, there are five main steps to a short sale, according to Stacy Spickes, co-owner of Texas-based America’s Home Rescue.
They are:
1. Determine the type of loan the homeowner has. Is it FHA, VA or conventional?
2. Provide the current mortgage lender what they require to make a decision. Usually, one of those requirements is a short sale or hardship package, which is simply documentation that proves the hardship of the seller.
3. You also need to know what the current mortgage lender will net in the transaction. In a short sale, the lender will take a loss and will also pay the commissions and closing costs on behalf of the buyer. If this is not acceptable by the mortgage lender, they will deny the package.
4. Know the terms the banks will and will not approve in the buyer’s purchase offer. Understand that banks will not take a huge loss so you can walk away with large amounts of cash in your pocket, 100% equity in the home or large gains through a quick flip. You as the buyer must demonstrate a fair and equitable outcome.
5. Establish an alliance with loss mitigation representatives at the banks that will get the short sale approved and closed. Always be polite and try to get to know the reps in these loss mitigation departments. If they know you personally, your chances of approval go up dramatically. Be warned, this step may take some significant amount of time to complete.
Good Luck and I wish you success!
-Paul
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