With the proliferation of mortgage defaults and foreclosures in Louisville, KY real estate short sales have become very popular. Both owner-occupants and investors have found that short sales can be a solution to challenging real estate problems. While it is true they are useful tools when applied to the appropriate situation, we are going to look at all sides of a short sale transaction so you will be a fully-informed buyer. Sellers will also benefit from this information because it will help them determine what steps to take if they wish to try a short sale for their property.
What is a Short Sale?
In simple terms, a short sale happens when a lender accepts less than the principal amount of money that they are owed by the seller and allows the property to be sold. For example, if you are trying to sell a home that has a fair market value of $200,000 and you owe $210,000 on the property, once all the costs associated with selling are paid you will be well short of the principal amount owed to the lender. If you follow the lenders short sale procedures exactly, they may allow the sale to take place and incur a loss on the property. Keep in mind this is a simplified version of the process, as we will reveal.
Why Should You Try To Do a Short Sale?
From a seller’s perspective, a short sale may be the only way to sell the property and stop further financial hardship. Without the money to pay off the principal owed to the lender, technically the seller cannot sell the home. A short sale provides a workaround to this dilemma by allowing the seller a way to sell the property without paying off the principal loan amount owed.
From a buyer’s perspective, a short sale is a tool that can be used to purchase a home that otherwise most likely would be going into foreclosure and be unavailable for sale for an extended period of time. In a few cases, a short sale can also be a way to get a great deal on a home purchase. It is wrong to view all homes that are potential candidates for a short sale as a good investment, but with proper due diligence one can assure themselves they are receiving a fair deal for the home they intend to purchase.
How Do You Do a Short Sale?
For both buyers and sellers the most sound advice I can offer is to secure the services of a competent, experienced real estate agent to guide you through the short sale process. As a seller you must know that a lender will not allow a short sale to take place unless the home is listed for sale with an agent. This is done to protect the lender’s interests in the home by ensuring the home is fully exposed to the open market and the highest and best offer for the property is obtained. The seller’s agent must know how to manage a short sale, how to deal with the lender’s loss mitigation department, and how to advise the seller to protect the interests of all represented parties.
A buyer’s agent must also know how to manage a short sale, how to deal with the lender’s loss mitigation department, and how to best protect their client’s interests. Besides knowing how to find properties that are offered for sale as a short sale, the buyer’s agent must also ensure any property their client is interested in purchasing must be inspected in great detail, a thorough market analysis provided to verify the purchase price is correct for the current market, and all of the necessary paperwork is completed exactly as the lender specifies.
The general steps to a short sale involve first determining if the home is a viable candidate for a short sale. This is done by the seller with guidance from the seller’s agent by contacting the lender and getting all of the required documents for effecting a short sale. This documentation must be completed accurately and all of the supporting documentation provided so the lender can make a determination if they will allow a short sale to occur.
If the lender decides that the home is a candidate for a short sale they will have at least one, if not more, price opinions done on the home by third party appraisers or real estate brokers to give them an idea of what the home should bring on the open market. This number will be a key feature of the short sale. It is going to be used by the lender to determine whether or not they will accept an offer on the property for a particular price. Some lenders will make this number known to the seller and some will keep it private, so I recommend seller’s agents to submit their own opinion on pricing to the lender as they will typically have access to the house that the lender’s representatives will not. Send a full explanation with your price opinion, as well. If the lender gets the price wrong, the home will never sell as competent, well-represented buyers will know the current fair market value as well as anyone.
Once the lender has received all of the paperwork and they have a good idea of the fair market value of the home they will ask that the home be marketed for sale to the general public. Each lender will have different procedures, but mostly they will want to view all offers on the property themselves and then specify exactly what they will accept, and which parts of any offer to counteroffer. Once the lender is satisfied with the complete offer, you will then proceed forward as normal with the transaction per the contract and begin working towards closing.
Short Sale Tips and Advice
A short sale can either be a pleasant real estate experience, or it can be a real pain in the you know where. My experience has shown me that it all depends on how the lender’s representatives and the seller’s agent interact and work together. If the seller’s agent knows what they are doing and can anticipate the lender’s needs to ensure all of the necessary paperwork is completed in a timely manner exactly as requested, then the process stands a good chance of going well. This is why you need an experienced agent to manage this transaction. Don’t worry about the cost of an agent at this time because part of the short sale process is the lender agrees to pay the agent’s commission.
Seller’s need to make sure they fully understand the contractual obligations they face by doing a short sale. The lender may force you to sign a promissory note for the loss they incurred from the short sale. There may be negative credit score or credit report actions that will affect the seller’s ability to get new housing. It is possible that there are tax consequences, as well. Seller’s need to discuss all of this and more with their real estate agent, plus they should seek guidance from a real estate attorney and tax professional to ensure they are aware of all possible outcomes.
Buyers need to know that a short sale does not necessarily mean they are receiving a good deal on the purchase of a new home. It can be quite the opposite without a complete understanding of the local market conditions, a thorough market analysis, detailed home inspections, and a real estate agent looking out for their best interests. A short sale gives a buyer the opportunity to buy a home that was going into foreclosure, but that is all it can guarantee. Lenders are not going to just give away their money, but on occasion they will allow a property to go for less than fair market value given the particular home’s condition. If you happen to be in a position to find and purchase one of these homes, congratulations, but know that you are in the minority.
As you may have guessed from this post, I have been in a position to work short sales as a representative of both buyers and sellers. I have tried to give you a fair overview of the process, but each situation is unique and must be approached from that perspective. I will be happy to answer all of your questions and to help you in any way I am able with all of you real estate needs. You can search for all Louisville, KY Homes for Sale, or contact me, Joe Hayden, Realtor, at the highlighted links.