Is a short sale the right option?
With home values falling in recent years, some homeowners who need to sell in today’s market find themselves trapped, owing more than their home is worth. In this situation, the short sale can become a viable option.
What is a short sale:
A short sale is simply a sale in which the proceeds are not sufficient to cover all outstanding obligations associated with the sale of the home, including the mortgage or mortgages, unpaid property taxes, attorney’s fees, title expenses, commissions, etc. This shortage would require the seller to bring money at closing or negotiate “short” compensation with their lender. The lender is not required to agree to this, but many will. In most cases, sellers who are facing foreclosure or who have fallen behind and can no longer make their payments attempt a short sale.
The process:
There are many misconceptions about the short sale process and the role of the lender in it, even among some real estate agents. The role of the seller’s lender is nothing more than that of a contingency. This can vary by state depending on whether it is a title theory state or a lien theory state. This information applies to Illinois, which is a lien theory state (the owner has the title and the lender has a lien on the property)
The seller is the owner of the home and, ultimately, is the one who, with the help of their agent, accepts, rejects or proposes a counter offer once the offer is received. When the seller accepts the offer, they do so depending on whether their lender agrees to accept the net proceeds of the sale as full settlement of the amounts owed. On more than one occasion, an agent working for a buyer asks when their offer will be sent to the bank, even before the seller has agreed to accept it. It can add to the confusion if multiple offers are received. Some think that all offers should be presented to the lender. This is not accurate. All offers must be presented to the seller, not the lender. The objective of the publicly traded agent should be to obtain the best possible offer, thus giving the transaction the best possible chance of closing.
What are the odds of a successful closing?
They are actually better than they used to be. Today it makes sense for banks to seriously consider taking a short sale as in many cases they are getting more money overall rather than going through the entire foreclosure process, repossessing the home, and marketing it as REO (real estate). Illinois is a judicial foreclosure state. Some states are not judicial. Judicial foreclosures take much longer to complete. In Illinois, the process can take a year or more. There are some states that take more than 3 years. When you consider that, in most cases, the bank receives nothing while the process drags on, you begin to see their motivation to consider other options. Add to this the deterioration of the property during that time and the additional maintenance costs, and the benefits to the bank become even clearer. The bank in this situation, like the owner, is looking for the best way to limit its losses.
The benefits of a short sale:
Lenders generally do not allow the seller to receive the proceeds of the sale. This is fair when you consider that the basis of the short sale is negotiating with the lender to accept less than what is owed to them. The only exception I’ve seen to this was years ago when, due to an error, we were out of balance by $ .06. The title company actually gave the seller a check for six cents! As a seller in this situation, one should keep in mind that if the lender agrees to the short sale, they are allowing the seller to avoid having a foreclosure on their record that haunts them for many years. Additionally, most short sales also allow the seller to get out of debt without being haunted by a deficiency. These two things should be all the motivation you need. There are no guarantees of success, but it is certainly worth the effort.
Who should you call?
These transactions are not for beginners. There is no substitute for experience when it comes to navigating through this process. An experienced agent and attorney are crucial. In this situation, it makes sense to ask a lot of questions. There are specialized short sale / foreclosure courses available to agents. Some are very valuable, but these courses alone do not necessarily make the agent an expert. An agent referred by a seller who has been through this process is definitely someone worth talking to.
How much will it cost?
In most cases, it will cost you nothing unless the agent charges an upfront fee to list the house. All agents negotiate their own rates. It shouldn’t cost you anything to talk to an agent and get information. All commissions and other closing costs that a seller would normally pay will be taken into account and if the lender agrees to the short sale, they are accepting the net amount of the sale, so essentially it is the lender who pays. your closing costs. For someone facing foreclosure, a short sale can be an excellent solution.