When do you know if a short sale is the best option for you? Here in New York, where I hold my broker's license, Mahopac Real Estate has seen an exploding number of short sales. However, short sales are not for everyone. Let's talk about the process and what you need to qualify.
Why would any bank or mortgage holder agree to a short sale? Because, banks are not in the business of owning and managing real estate. They are in the business of lending money and having real estate owned (REO) on their books negatively affects their credit rating with the Federal Reserve, hindering them from borrowing money and at a good rate. Moreover, it is less costly for a bank to accept less than originally agreed upon than to incur the expenses of selling the home at auction or worse, not being able to sell the home at auction and having to hold on to the property until it sells on the open market. Believe me, the last thing they want to do is foreclose.
How does a short sale affect your credit? Someone online once made a perfect analogy to explain the difference between how a short sale affects your credit versus how a foreclosure affects your credit. She said that one is like getting hit by a car while the other is like getting hit by a mac truck. Some say that there is no difference between the two, as far as credit is concerned. In my experience, you can recover a lot quicker from having a short sale on your credit report compared to a foreclosure. Some people have reported drops of 200 points after the former and a 300 point drop after the latter. Even if the point drop is about the same, other people have reported being able to purchase a home again two years after a short sale, whereas, after a foreclosure you can forget about buying another home for at least 7 years.
If you owe more than your home is worth, many people think right away that a short sale is an option for them. Just because you owe more than your home is worth is not reason enough. More importantly the bank must see that you are experiencing a financial hardship and are unable to pay the monthly payment amount. If you are on time with your payments, it is unlikely that the mortgage holder will grant you permission to sell the home for less than you owe and pardon you of the amount not covered by the sale. They would rather you continue to make the monthly payments.
Now, you have decided that a short sale is the best option for you, you have proved your financial hardship and the mortgage holder allows you to pursue a short sale. You then must go through the same process of selling your home as anyone else. You preferably list with an agent or broker, as opposed to selling on your own, since your situation needs more special attention and expertise than normal.
Keep in mind that you are still expected to make your mortgage payments during the "for sale" period and the short sale process can take 6 months to a year. Congress is working to pass legislation to force the banks to respond in a more timely fashion but as for now the process is still a long one and requires a ton of patience.
Once you have found a buyer, you must then go back to the bank and see if they will accept the amount that was agreed upon between you and the buyer. In a short sale situation, things get tricky because you are now, effectively, negotiating with two other parties, not just a buyer. The bank will then send someone out to obtain a BPO, or broker's price opinion. They will base their decision on this BPO and whether they believe they are getting a fair price for your home. Obviously, the bank is already losing on the deal because they are accepting less than they were promised, so they definitely do not want to lose more on the deal by accepting less than the current market value.
One advantage, if any, to take away from this situation is that you do not have to worry about paying the broker's commission or bank fee. The price that the bank accepts from the buyer will cover all expenses and fees. While in negotiations with the bank and the buyer, the bank will often give the broker a number that they have to walk away with after the commission and all fees have been covered.
All states are different and I am not an attorney so if you think a short sale is for you, please verify all this information with your legal counsel.