Video Transcript: Short Sales
Stacey: Have you been hearing a lot about short sales, but don't know what they are? These are properties that some homebuyers chase down with the hope of snagging a deal. What do you need to know before you buy one? Let's find out on "What Works Now."
Voice Over: AOL and Bank of America Home Loans – helping you find out what works now.
Stacey: If you see a house listed as a home sale, that means the homeowner is trying to sell the property for less than he owes on his mortgage.
Narrator: A bank may agree to this if it fears the seller would otherwise go into foreclosure. Some buyers seek out these properties since they often sell at a discount on the market. We decided to sit down with a real estate expert to learn more about short sales.
[Enter Neil Garfinkel, real estate attorney]
Neil: A short sale is a situation where a seller has an existing mortgage on their property, and they'd like to sell their property. Unfortunately, the marketplace is such that the proceeds they can sell the property for are not enough to cover the existing mortgage balance. So what they would do is contact the lender, and see if they'd be willing to take less than the outstanding balance of the mortgage. If the lender decides to do that, then the transaction can close, and thus the term short sale – they sell for a shortage of the amount that's owed on the outstanding mortgage.
Stacey: What's in it for the bank? Why not just foreclose on the property?
Neil: Lenders aren't in the business of owning property. In a foreclosure situation, the lender would have to obtain the property back through a foreclosure action. They would then have to maintain the property, and find someone to sell the property to. In the short sale situation, the seller has already found someone who's willing to take the property. The lender then just has to make a decision whether to proceeds from the sale are enough to cover at least a portion of the mortgage.
Narrator: Short sales require a great deal of research from the buyer. You should view the property, identify all the liens and mortgages, and get preapproved for a loan before making a bid.
Neil: In order for a buyer to successfully navigate a short sale, I would recommend that they put together a team of professionals that have experience in dealing with the short sale process. A good real estate broker, a good mortgage professional, and perhaps an attorney will assist the buyer in navigating the short sale process.
Buyers should certainly have the opportunity to escape – to get out of the contract, if for example, it's taking too long. It's entirely possible that the short sale process could take six months, so the buyer may want to get out if their mortgage commitment expires, or if they would just like to move on to another property. Because time can be a significant factor in short sales, the ability for the buyer to get out is a very important contingency to have in the contract.
Stacey: What are the risks for the buyer?
Neil: The biggest risk that a buyer runs in connection with a short sale is the loss of time. Because they can't control how quickly the lender will make the decision, it's entirely possible that they can go through the entire process, which can take up to six months, and ultimately the lender does not accept the transaction. If you couple that with the potential loss of out of pocket expenses-- the cost of an application for a mortgage, attorney's fees and so on -- the two biggest risks would be time and, potentially, money.
Stacey: Now you're in the know the next time you hear people talking about short sales. Would you consider pursuing one, or would you prefer a more straightforward sale?
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