In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation.
A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack of), by determining the probable selling price from a Broker Price Opinion BPO (also known as a Broker Opinion of Value (BOV)) or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
A short sale will require the bank to reduce your payoff to an amount that makes business sense for us to buy it so it’s worth our time to pursue the bank negotiation and resale the property at a profit. Right now, there is no equity in your home until we negotiate with the bank and create the equity we need.
As you may know, 90% of pre-foreclosure homes like yours… even though they are listed will not be purchased because a buyer won’t usually come along that knows how to deal with the banks and willing to stay with the negotiation past a couple of weeks, most buyers want to move into a home within weeks, and while homes like yours may get interest, they rarely get to the closing table. That’s why I am contacting you to explain why we are different than most buyers and why we might be your best chance for preventing the foreclosure and getting your home sold to us.
Here’s how we work these short sales deals with the lenders. It works like most home negotiations except since you are not allowed to make any cash at the closing table; the negotiation is between us and your Lenders(s). Now, they would like to get a really high price for it of course we, the buyer, want as low a price as possible. We start low and they will counter with a higher price, it will go back and forth until we meet at the right price that works for both of us. Before we start negotiation with the bank, they will require that we have a written agreement, we use an option to buy your home. We will also immediately start marketing via the realtor and MLS to find another buyer at the price that we think will attract a buyer at very quickly while allowing us to make our profit. While this is happening, we will complete the negotiations with the bank. Short sale negotiations are not as fast as if you were not in this situation and you were selling it the normal way. Between people, negotiation can be a few days to a week, but with short sales, it can take a month or longer, some can take 3-4 months. Banks are backed up with foreclosure files and it just takes time. Time we are willing to put in and complete. Now 2 things will occur once the negotiations are completed. Either we have a price that allows us to buy the home or we have a price that doesn’t allow us to make enough to buy it and we will just take a small negotiation fee and let any buyer that we have been able to find during the negotiation to purchase the property directly from you. It’s rare that the second case occurs, but it does happen sometimes. What we want to happen is to earn the profit we create which is the difference between what we negotiated with the bank and what the buyer we find is willing to pay. So our profit will be that difference we negotiate minus our expenses. We do incur expenses through this negotiation process, and so we at least need to make a minimum amount in order to stay profitable.
As you know the lender does not allow you to make any money on the sale of your home. But preventing the foreclosure should be your main goal here and so, if for some reason the negotiation fails to work out with the profit we need, either we have a buyer and will just back out of the deal place our negotiation fee on the HUD-1 as an expense paid by the bank and let you sell to them at the price the bank agreed to just to prevent the foreclosure; or if there is still no buyer, you still benefit in that you now have a better asking price in the MLS that might help sell your home to a buyer the agent finds during the remaining listing period. A sell becomes much highly probable because there is no waiting time for the buyers since the bank has now accepted some lower amount and the buyers can close within a few weeks… just like a regular home. This is why it should be a win for you no matter what happens, but we could take a hit if we can’t get the price that works for us.
Now let me cover how we price your property and why we go through the steps we do. First, the Realtor will give us an amount of what they think today’s fair market price for a similar home would sell for that is NOT in foreclosure. We then take about 60% of that amount and place that as our first offer to the bank. That’s not the price they will usually accept, but that is what starts the negotiations.
Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.
