With the decline in home values in the past few years, some homeowners who need to sell in the current market find themselves trapped, as they owe 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 enough to cover all of the 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 to the closing or to negotiate a “shorted” payoff with their lender. The lender has no obligation to agree to this, but many will. In most cases, a short sale is attempted by sellers who are facing foreclosure or have fallen behind and no longer have the ability to continue making their payments.
There are a lot of misconceptions about the short sale process and the lender’s role in it, even among some Realtor®s. The seller’s lender’s role is nothing more than that of a contingency. This can vary by state depending on whether it’s a title theory state or lien theory state. This information applies to Illinois, which is a lien theory state (the owner holds title and the lender holds a lien on the property)
The seller owns the home and ultimately is the one who, with the help of their agent, accepts, rejects or proposes a counter offer once an offer is received. When the offer is accepted by the seller, it is done so contingent on their lender agreeing to accept the net proceeds of the sale as full settlement of the amounts owed. I’ve had more than one occasion where an agent working for a buyer asks when their offer will be submitted 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 must be presented to the lender. This is not accurate. All offers must be presented to the seller, not to the lender. The goal of the listing agent should be to obtain the best offer possible, thereby giving the transaction the best possible chance of actually closing.
What are the odds of a successful closing?
They’re actually better than they used to be. Nowadays it makes sense for banks to seriously consider accepting a short sale as, in many cases, they net more money overall versus going through the whole foreclosure process, taking the home back and marketing it as an REO (Real Estate Owned). Illinois is a judicial foreclosure state. Some states are non-judicial. Judicial foreclosures take much more time to complete. In Illinois, the process can take a year or more. There are some states which take upwards of 3 years. When you consider that, in most cases, the bank is receiving nothing while the process drags along, you start to see their motivation to consider other options. Add to this the deterioration to the property during that time and the additional carrying costs, and the benefits to the bank become even more clear. The bank in this situation, much like the homeowner, is looking for the best way to limit their losses.
The benefits of a short sale:
Lenders generally don’t allow the seller to receive any of the proceeds of the sale. This is fair when you consider that the whole basis of the short sale is negotiating with the lender to get them to take less than what they’re owed. 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 cut a check to the seller for six cents! As a seller in this situation, one needs to 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 which follows them around for many years. Additionally, most short sales also let the seller out from under the debt without being chased for a deficiency. These two things should be all the motivation you need. there are no guarantees of being successful but it’s 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 for agents. Some are very worthwhile but these courses alone don’t necessarily make the agent an expert. An agent referred by a seller who’s been through this process is definitely someone worth talking to.
What will it cost?
In most cases, it will cost you nothing unless there’s an upfront fee charged by the agent to list the home. All agents negotiate their own fees. It should cost you nothing to talk to an agent and get information. All commissions and other closing costs a seller would normally pay will be factored in and, if the lender agrees to the short sale, they are agreeing to the net amount of the sale so essentially, it is the lender that is paying your closing costs. For someone facing foreclosure, a short sale can be an excellent solution.