Simply put, a short sale is selling a home below the amount currently owed to the lender(s).
There are times when this makes sense to both the homeowner and the lender. When the alternative is foreclosure, a lender would rather sell a home “short” if financially it is cheaper than the foreclosure process, which costs around $30,000 on average. Largely due to the financial burden, banks do not really want to own real estate. For the homeowner, it is less of a ding on their credit but does not always eliminate the obligation to pay the “shortage” back to the lender. Many times the lender will require the owner to pay back the shortage on a personal loan in exchange for agreeing to the short sale. Depending on the owner’s financial circumstances, the lender may completely “excuse” the shortage and write it off by issuing the owner a 1099 income statement. This brings up another issue – income tax may or may not be owed on the “shortage” amount.
When purchasing a short sale home it can be quite frustrating and time consuming. Although most lenders have gotten more efficient and better at short sales, responses to offers can take 2-5 months. If you have a short time line to purchase and take possession of a house, then short sales would be best left for others to pursue. With that being said, a buyer that has plenty of time can usually negotiate a favorable price. Remember the “List Price” on a short sale is just an educated guess by the homeowner and listing agent. They simply put a price on the home and gradually lower the price until they get an offer. It is not unusual for the lender to counter offer a price above the listed price. When this happens, some buyers walk away completely frustrated and upset that they have wasted months and possibly missed other great homes in the mean time.
Having a good buyer’s agent is the key to deciding whether a short sale is worth pursuing or not. Every home has a different set of circumstances to deal with and some are better values than others.
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