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Oklahoma Real Estate Questions: What is a 'short sale'?

Posted by Rob Schaerer on Saturday, February 11th, 2012 at 6:25pm.

A 'short sale' is a term that is used to describe a situation where an owner of a property agrees to sell a property for less than they owe on the property, and the owner asks their lender to accept whatever is left over after all of the selling costs as complete payment of their mortgage. 

Why do Lenders agree to allow short sales?
It might seem like it makes little sense for a lender to accept less than they are owed on a property at all, but when a lender is faced with a situation where they either accept less for the property than they are owed or foreclose, a lot of the time it makes financial sense to do so.  By the end of a foreclosure proceeding, a house could have been sitting vacant for a long time before the lender/investor/agency receives title to the property, with the house sitting exposed to the elements the entire time, deteriorating the value of the home (read: the bank's asset), whereas in mose cases, the short sale decision is made when the owner is still living in the property so the house isn't sitting vacant.  In addition, the foreclosure process takes a lot of the lender's time, and resources to complete.  The lender will have to retain a law firm in the area of the property that will be able to assist them with the foreclosure process, and file all of the necessary paperwork, costing the lender thousands and thousands of dollars in the process... all the while their asset might be declining in condition and value.  Not only this, but with a foreclosure process, the lender actually becomes the owner of the property, along with whatever defects/market conditions that might be affecting the property at that time.  With a short sale, the lender never has title to the property, and the lender knows, up-front, how much they are going to be netting from the process.

Why do sellers agree to do short sales?
Sellers, on the other hand, will agree to do a short sale as a last resort to avoid foreclosure and help save their credit (a short sale is not as bad for an owner's credit as a foreclosure is).  The seller will walk away with nothing, and in most cases the lender will agree not to pursue them for the difference between what the sellers owe and what they are going to pay the lender (in foreclosure cases, it isn't uncommon for the judge to assign a lien to the person after going through a foreclosure, requiring them to pay the difference back).  Believe it or not, it is becoming common now, for lenders to actually help the sellers of homes to help the lenders with the short sale process so that the owners will continue to take care of the home (read: banks asset), and not do intentional damage to the home or let it sit vacant.  

What is the short sale process?
A seller will list their property with a real estate agent at a price that will receive offers knowing that the buyers of the house will be buying the house 'as-is' and without knowing for sure when the house will close (or whether the lender will change the terms of the sale prior to closing).  Because of these factors, a buyer will usually pay less for the house than they would under normal market conditions, so the list price of the properties are generally below what would be expected if the house was listed for sale under normal conditions.

A buyer will place an offer on a short sale, and the seller will then use the offer to negotiate with the bank to do the short sale.  The lender will usually send out 3rd party real estate professionals to give their opinion of the value of the home so the lender will be able to better assess whether the offer that they have on the property is reasonable given the market conditions and condition of the home in question.  If the price opinions come back in-line with what the offer is made at, the lender, will usually accept the short sale, provided all other criteria is met to continue with the short sale process (it varies from lender-to lender).  The process from start to end can take in upwards of 6 months, with the possibility that the lender might not approve the short sale at all.

Benefits of Buying Short Sales
The benefits to a buyer of doing a short sale are clear: The property is usually being occupied, so defects are more apparent, they have the opportunity of doing normal inspections on the property without having to get the utilities turned on prior to them doing so, and, of course, the price that properties undergoing a short sale are usually very attractive to the buyer.  

Drawbacks of Buying Short Sales
Although the price may be attractive, there are some clear drawbacks to buying a short-sale property.  For one, if a buyer is wanting to purchase a property to live in, there are no guarantees to the time frame that they would be able to complete the purchase, so living arrangements for an owner occupant buyer could be stressful while the short sale is being processed and evaluated for approval by the lender.  Additionally, if the short sale process takes months, a buyer wouldn't be able to lock in loan terms until the closing date was definite, leading to the possibility that the buyer might have to accept a higher rate than current rates, or cause them to have their funds or funding tied up until they either cancel the contract or the short sale goes through.

Are there many short sales in the Oklahoma City area? 
Short sales are becoming more and more prevalent everywhere.  While the Oklahoma City metro area (including Norman, OK, Moore, OK, Oklahoma City, Edmond, etc..) has been somewhat sheltered from what has been going on with the national housing market, short sales are becoming a larger part of the market.  According the the Oklahoma City MLS system, of the 7500 properties that are currently listed, 173 are advertised as being 'short sales,' which means that short sales make up appx. 2.3% of the market (this figure is likely higher, as some short sales may not be marketed specifically as being such).  

Are you looking for a Realtor in Norman OK, Moore OK, or Oklahoma City that can help you with the purchase of a short sale or are you looking for an agent that can help you short sell your home?  Contact me today!

2 Responses to "Oklahoma Real Estate Questions: What is a 'short sale'?"

Caroline wrote: Great blog, Rob! We had a short sale in our neighborhood, but I had no idea what that meant. My question is from the seller's standpoint: How much will it hurt to short sell your home? Your credit, that is.

Thanks, Rob!

Posted on Tuesday, March 20th, 2012 at 3:08pm.

Rob Schaerer wrote: Caroline, As a seller a short sale doesn't affect your credit as much as a foreclosure, however, when it goes through it would be posted on the sellers credit as a settlement of a debt. As far as actual credit score hits, it might vary a little. Also, you might not be able to purchase another home for a while. For instance, FHA requires that 2 years go by before you can purchase another home.

Keep in mind though, that it is only a negative credit item if you are unable to pay the difference and ask the lender to 'settle' on your mortgage balance.

I hope this helps!

Posted on Tuesday, March 20th, 2012 at 3:32pm.

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