In your search for a home in NYC, you might come across the term “short-sale.” This is when a homeowner sells their property for less than the amount they owe on the loan. The owner is “short” the cash to keep up with their mortgage payments and to avoid foreclosure they elect to sell. The bank or lender must agree to this as they stand to take a loss. But they may still prefer it to foreclosure and having to take over the property.
Completing a short sale usually takes far longer than a typical sale. Both the seller and interested buyer will need a lot of patience and there’s always the chance that the bank will refuse the sale. Here’s what you need to know about short sales.
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What is a short-sale
Let’s imagine that Mr. and Mrs. Smith borrowed $400,000 to purchase a home some years ago. At the time of the purchase, the home was appraised for $400,000. At some point, Mr. Smith loses his job and they begin to fall behind on their mortgage payments. Upon doing a comparative market analysis, the Smiths learned that the value of their home has dropped to $310,000. Still owing $385,000 on their loan, they decide to sell and seek permission from their bank to sell for $310,000.
The bank will take a loss on this for which they won’t be happy. But that may still be better than having to repossess the home in foreclosure which is expensive and time-consuming. For the seller, a short sale allows them to avoid foreclosure along with the loss in credit and possible bankruptcy that it entails.
How long does a short-sale take?
Short sales usually take much longer than regular re-sale transactions. The average time between missing your first payment and foreclosure is four to six months. If the owner tries to sell after missing their first payment that’s how long it can be expected to take. The reason it takes so long is that banks won’t sign off on a short sale until they have a signed contract from a buyer. Any potential buyer will be cautious about signing a contract when they don’t even know if the bank will approve the sale. This catch-22 is usually resolved when the buyer agrees to sign a contract with a contingency that states the sale must be approved by a certain date.
What is the process of a short-sale?
Most short sales take place once the owner has missed their mortgage payment for the first time. Their choices are now looking very grim. They can choose to make a late payment plus fees, try to refinance or decide to sell. If the property’s value is now less than the loan amount then refinancing will be very difficult. Unless they can come up with enough money to pay the mortgage plus late fees, a short-sale may be their only option.
Once they choose to sell, the next step will be finding a broker that has experience with short sales and foreclosures. Working on their behalf, the broker will try to find the right person at the mortgage lender to approve the short sale. This can take some time as banks are typically overwhelmed and will have little time to deal with a short sale. Once the broker finds the right person they will ask for the bank’s short-sale application. This will require the borrower to once again provide all their financial details. They must be able to prove that they are no longer capable of keeping up with payments and have no assets that would allow them to make their payments.
Application submitted now what?
Once you submit your short sale application the most likely response is complete silence. The bank will not take it seriously until you have a signed buyer. Your only response is to have your broker list the property and do everything to secure a buyer as soon as possible. At this point, the process is no different from a regular sale. The present buyer’s market in NYC means that the average time on the market is now over 100 days. Once you have a signed contract it will then take another 30 to 90 days to close. This will depend on whether the buyer is paying all-cash or financing.
Any short sale will mean longer contract negotiations. Buyers won’t want to sign a contract or hand over a deposit if they can’t be sure the deal will even take place. The way around this is to negotiate for a smaller down payment and a set of conditions by which the contract will be canceled if not approved by a certain date. The due diligence period can also take longer if the title report finds a lot of issues. The sellers may owe money to multiple sources meaning potential liens and violations on the property. Should this happen, any debt holders with liens on the property will also have to agree to the short sale.
If you choose to buy a short-sale property be ready for a long waiting game. Banks are notorious for taking as much as several months to approve short sales. A deadline in the contract may spur them into action but it’s no guarantee. The bank may even prefer a foreclosure if they think they can get more money out of it. If you’re seeking financing for the purchase, make sure your lender is fine with a short sale property. You may even have to increase your offering price to get the bank to agree to the sale. The seller has no real authority on the sales price. Only the bank does, and they may make a counteroffer. You’ll also be buying the property in an as-is condition, so you need to consider any possible repairs.
Short sales can be beneficial to all parties. Sellers get to avoid foreclosure, buyers may be able to buy at reduced prices and lenders can avoid lengthy and costly foreclosures. The process is a long one and there’s no guarantee of it going ahead. Buyers should exercise caution and perform their own comparative market analysis on the home. Should you make it to escrow, do not skip the home inspection.