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The Ins and Outs of Short Sales

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The number of short sales that are happening in the current market is on the rise, in conjunction with the number of foreclosures popping up all over the place.  Like a foreclosure or bankruptcy, a short sale is another option for distressed property owners who owe more on the house than it is worth.  Although most short sales occur at the owner-occupied level, they are becoming more and more prevalent for rental property owners as well.

A short sale happens when a house is sold, and the mortgage lender agrees to accept a sale amount that is less than what is owed on the outstanding loan.  For example, if the amount of the loan is $150,000 but the house is only valued at $130,000, the lender might accept the $130,000 as payment in full, effectively forgiving the remaining $20,000 balance.

Generally, if you are involved in a short sale transaction, the real estate agent will need to get approval from the lending bank to move forward.  Not all banks will approve all transactions, and in all cases the numbers must be close enough to make financial sense for the lender (for example, in some cases foreclosing might make more financial sense to the bank).

This approval process could take quite a long time, as it is often difficult to identify the appropriate person within the bank to speak with, and there are usually a lot of paperwork requirements.  Although the requirements will vary from lender to lender, state to state, some of the more common ones include the provision of a preliminary net sheet (lays out all the numbers), a hardship letter (lays out the reasons the seller is in this predicament), proof of income & liabilities, listing agreement, and purchase agreement.

If you are considering selling via a short sale, it’s important to consult with your accountant so you understand all the financial implications.  You will also want to get an agent who is knowledgeable and experienced in short sales.  If you are looking to buy, you might be able to get a really good deal, but keep in mind that short sales can take several months to reach closing.

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