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Short Sale or Short Changed?

There’s a lot to be said about the state of the real estate market in a recseeion. In a depressed market there are usually so many deals, so little time and oh, so short on money. Most people are fully aware of the number of foreclosures in the hands of banks. And, of course, many people would already have tried their hands at buying foreclosed properties at the auctions. But, not too many people are aware of the short sale market, which has really turned up the heat on the foreclosure market. In fact, it can cause somewhat of a backlog on bank-owned foreclosed properties.

What is a short sale? It’s an agreed upon price that the bank will accept from a strapped homeowner who cannot sell his / her home. The price is negotiated on a number of factors. One is the ability or inability of the homeowner to make their monthly mortgage. In the case of impound accounts that includes property tax payments and insurance. Second, is the hardship that the homeowner can demonstrate? In other words, was the homeowner laid off or making less than the actual amount of the payments? Third, what is the property really worth? For example, if the loan amount is $300,000 and the property will only sell for $200,000, will the bank be willing to write off $100,000?

There are certainly many other factors that the bank will look at. In fact, they generally won’t even talk to you unless you’ve been delinquent in your payments for at least 3 months. In many cases, they won’t talk to you unless you’re six months behind. One of the reasons is that they are overwhelmed with cases and other reasons include the fact that they just don’t have enough qualified people who understand the process.

But, the real dilemma arises from the fact that while the potential new buyer makes out like a bandit, the current homeowner could well be short-changed. Think about how the current homeowner got into the situation initially. First of all, he / she was sold a property at values that far exceeded what they were really worth. Second, the broker / agent / lender likely sold them a bill of goods and should not have financed them in the first place.

Here, you have a situation where the current homeowner is living or renting out a property that is WAY upside down … value is far less than what anyone would pay for it. Their mortgage is higher than what the property is worth. And, they cannot make the payments. Short changed does not even come close to describing the real situation.

Not only does the homeowner lose their home, they’ve also ruined their credit. A short sale is typically not as bad as a full foreclosure or bankruptcy, but it could very well reduce your credit score by between 50 and 100 points. Try getting another loan to buy another home with THAT on your credit. This is exacerbated by the fact that lenders don’t want to lend any more money.

Complicating matter is that a borrower really should work with agents / brokers who know how to negotiate with lenders on a short sale. These types of agents, though, are incredibly hard to find. Over the last 10 years, practically everyone was working on LONG sales. In other words, sales that assumed appreciation, not depreciation.

Worse, the lenders themselves are not prepared for the onslaught. A lot of lip service has been given to helping homeowners stay in their home, but nothing has been done to help the homeowner save his / her credit. And, what about the poor “investor” who got into deals “pushed” by shady real estate agents. These poor folks are even more messed up. The government and the general, in public, wants to wash their hands of them.

A short sale may be good for the new buyer, but in the end it’s a lose / lose for the lender and the original borrower.

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