Short Sale as a way to prevent foreclosure

A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing.

A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. 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 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 climate and the individual borrower's financial situation.

For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, 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.

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.

As the real estate market tightens, there will be more and ore short sales available.

This may sound good for you as an investor, but wait... the seller may accept your offer, but it still has to get accepted by the Mortgage Company. As you may expect, most of the time you will get a much higher counter offer. After all they are in the business of making money.

What can we do?

Be prepared for Negotiations!

• Do your homework first. All the facts and figures must be worked out and written (preferably in bullet point format) in front of you before you talk to the lender. Remember, they want to recoup as much of the original investment as possible, while you want to stay within the profit margins you have set to make the deal attractive to you.
• Research what is owed on the property.
• Every lender will have different rules, regulations and paperwork. Make a brief call and find out what that specific lender requires.
• Don't forget that the Real Estate Market is Cyclical!
• Emotions are to be acknowledged and put away; they have no place in deal-making.
• Have a Realtor who is a strong negotiator on your side. Not only will they have to negotiate the price of the property, but also make sure that the commission is paid by the lender and not you (the buyer).

For more information, please visit www.caziz.com or call 802-299-7580 and ask for Cherif.