Most if not all consumers have now heard the term “short sale.” The term itself acts as a partial definition. You are selling something for less than a predetermined amount. Of course with real estate, you are selling a piece of property for less than you owe on it.
The typical process that distressed property owners, real estate professionals, real estate attorneys and lenders are familiar with involves the property owner taking steps to start the short sale process. This property owner most likely will speak with a real estate agent, attorney or his lender first about possible options and the possibility of the short sale, but then choose to proceed on his own will. The lender on the property oftentimes does not get involved until once the home is under contract when at that point it will have to determine whether or not to accept the price and work out a deal on the deficiency with the seller. The seller, buyer and both parties’ real estate agents may have a general idea of an acceptable price based on recent sales, but no one really knows how the bank will handle the sale. The price might seem reasonable, but the seller and lender may not be able to work out what to do with the deficiency on the loan. The lender is always the wild card in a short sale that always has the ability to sweep in and kill the deal at the last minute.
Proactive mortgage servicers are now taking steps to simplify this unknown step in the short sale process. Enter the Lender Initiated Short Sale.
Lenders are now approaching delinquent borrowers and presenting them with the short sale option. Before going further, it is important to note that not every delinquent borrower is eligible for the benefits afforded by the short sale process, but many delinquent borrowers are eligible and do not know it.
Lenders will approach a qualified delinquent borrower about the short sale option and then help to connect them with a real estate agent capable of handling the process. This is a great first step because the borrower and real estate agent are starting down the short sale path with a conditional blessing from the lender on the property.
Sales price is typically a place for a hang up in a short sale because the lender has to accept the price relative to the overall deficiency and current market conditions. In a lender initiated short sale, the lender may leave the price up to the real estate agent. The lender essentially hand picks a qualified agent and trusts the agent to come up with an accurate price. The agent knows that the lender has its own valuation of the property and will generally accept an offer that is within 10% or so of that amount.
In some cases, the lender sets the price of the property and then instructs the borrower and the agent as to what to list the property for. This situation is optimal for the buyer and the seller. Instead of waiting months for the lender to approve a sales contract, the buyer and seller may have an answer within 24-48 hours.
This situation is a huge help for the markets. Short sales continue to plague real estate markets and weigh prices down. Part of the problem with short sales is the uncertainty associated with the possible time frame and the possibility that the bank may simply reject a contract. This leads to more borrowers winding up in foreclosure when a short sale would have been much better for both the lender and the borrower.
It is important to note that a lender initiated short sale is not a guaranteed sale. The borrower’s financial situation may change or the real estate market may experience a change that either increases or decreases the amount the lender is willing to accept. One of the other land mines to look out for is the possibility of second mortgages or junior liens on the property that the primary lienholder does not realize about at the time of initiating the sale. These may pop up in a title search and send the whole deal into a tailspin.
Despite the potential issues with this type of short sale, it is an important development. Lenders continue to see the importance of getting bad loans off the books and helping borrowers to do so with minimal impact on their credit scores. The real estate market and economy as a whole will continue to improve as fewer distressed properties remain on the books.
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