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Understanding Short Sales

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If you are in the market for a home, you have undoubtedly encountered the term "short sale" when perusing real estate listings of single family homes. In spite of its name, this type of home selling situation has nothing to do with the length of time the selling process will take. Read on to learn more about short sales and what it might mean to your ability to buy one of these homes.

What is a short sale?

The market will always hold a fair share of these type of properties, particularly given the inflated home values on which some home loans were made in the past. For homeowners who wish to sell their homes, having a home that is worth less than the current mortgage balance can spell trouble. After all, how can you satisfy the bank loan if you cannot sell your home for more than it is worth?

For instance, say you still owe about $300,000.00 on your mortgage but your home has been appraised at only $250,000.00. The value of the home has dropped since the origination of your mortgage. In some cases the value of the neighborhood declined and in some cases the value was over estimated in the first place. Homeowners may also have a home equity loan on top of the mortgage, which will need to be satisfied if the home is to be sold.

Enter the real estate short sale

It should not be a surprise that banks dislike having to foreclose on a property. It can mean that the lender will need to become more of a real estate agent than a lender, since they must deal with empty homes, maintenance issues, vandalism and more. Additionally, foreclosed homes will need to have their lawns maintained, since code enforcement can impose fines for grass left to grow too high.

The bank may agree to take a lesser amount to satisfy the mortgage to avoid having to foreclose on the home. They reason that getting some money for the property is better than no money, and they won't be saddled with dealing with the property and all it entails. For a short sale to work, the seller has to convince the bank to take the reduced amount, which is often at or near the appraised value of the home, so that the home can be sold.

What you need to know

Be very careful about entering into real estate contracts with short sales. Despite the name, they can take a lot longer to close on and can be quite a bit more complicated. You may need to come up with more of the closing costs, and the seller is unlikely to be able to afford to make any repairs to the home. Discuss any short sale possibilities with your real estate agent.

 


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