SS251: What is a Short Sale – Short Sale vs Foreclosure

SS251: What is a Short Sale - Short Sale vs Foreclosure

Both short sales and foreclosures occur when property owners fail to make their mortgage payments. In this episode, Charles discusses the differences between short sales and foreclosures and how they can affect property owners differently.

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Talking Points:

  • Short sales and foreclosures are similar in the fact that in both situations, the homeowner loses their home, usually because they are no longer able to afford the mortgage payments. However, the two processes are very different.
  • I purchased a property I flipped during the GFC through a short sale, and my parents bought their current home during the GFC as well, through a short sale, and it is not a simple process for anyone involved.
  • A short sale occurs when a homeowner sells their property for less than the amount owed on the mortgage. The lender then needs to agree to accept the reduced payoff amount, as it will often be less costly and faster than going through a foreclosure. A short sale is somewhat similar to a landlord who gives their tenant cash for keys instead of going through an eviction. It is a faster way to cut their losses. Short sales are more prevalent in down markets where properties are underwater, and are rare in up markets where most homes are selling for more than the underlying mortgage amount.
  • How Does a Short Sale Work?
    • If a homeowner is experiencing financial hardship and they owe more on their home than it is worth, they can ask their lender for a short sale. If the lender agrees, the homeowner lists their home for sale, and the lender must approve the sale price and the offer. The property proceeds go to the lender, and the remaining debt may be forgiven, or the homeowner may be responsible for the remaining amount, known as the deficiency. 
    • Why would the lender and the homeowner agree to this? It is less expensive for the lender than a foreclosure and usually less damaging to the homeowner’s credit, since they are avoiding a foreclosure.
    • If you are buying a property from a short sale, prepare yourself for a long process that will last several months, especially if there is a divorce between the homeowners. In that situation, not only do you need the property sale to generate a legitimate offer, but you need the bank to agree to that price and not just one, but two homeowners to agree as well.
  • What are the Differences Between a Short Sale and a Foreclosure?
    • Short sales are initiated by the homeowner, and the homeowner handles the property sale and controls the process. During a foreclosure, the process is initiated and controlled by the lender, who takes legal action to repossess the home. The bank will then sell the home itself after the foreclosure has been finalized.
    • As an investor, buying a home via short sale is longer and more time-consuming; however, usually the properties are in better condition when compared to a foreclosure, where homeowners stop performing any maintenance since they are losing the house. If you are a homeowner going through a short sale and the bank is holding you responsible for the deficiency, it is in your interest to obtain the highest price possible, as every extra dollar you receive from the sale is one less dollar you need to pay the bank.
    • The damage to the homeowner’s credit is less severe with a short sale, but it is still damaged. During my research, I found that a short sale remains on your record for 4 years, compared to 7 years for a foreclosure. 
  • A short sale is a sale that is initiated by the homeowner when they owe more than the sale price of their home. Short sales are less harmful to borrowers than a foreclosure, and it allow sellers to minimize their credit damage while the lender avoids the cost and hassle of repossession. Of course, the best situation for both parties would be to hold the property until the sale price exceeds the mortgage payoff amount, but if the borrower is unable to make payments, a short sale might be a viable option. 

Transcript:

Charles:
Short sales and foreclosures may sound like the same thing, but the differences have a significant impact on both the property owner and the buyer. Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re breaking down what a short sale really is, how it works, and why it’s different from a foreclosure. And by the end of this episode, you’ll know that a key differences, the pros and cons for both the property owners and the investors, and exactly why this knowledge is crucial if you ever face or invest in these situations. So let’s get started. Short sales and foreclosures are similar in the fact that in both situations, the homeowner loses their home usually because they are no longer able to afford the mortgage payments. However, the two processes are very different. I purchased the property, I flipped during the GFC through a short sale, and my parents bought their current home during the GFC as well through a short sale.

Charles:
And it is not a simple process for anyone involved. So a short sale occurs when a homeowner sells their property for less than the amount owed on the mortgage, and the lender then needs to agree to accept the reduced payoff amount as it will, often less costly than faster than going through a foreclosure. Now, a short sale is somewhat similar to a landlord who gives their tenant cash for keys instead of going through the full eviction process. It is a faster way to cut their losses, and short sales are more prevalent in down markets where properties are underwater, and there are rare and up markets where most homes are selling for more than the underlying mortgage amount. So how does a short sale work? Well, if a homeowner is experiencing financial hardship and they owe more on their home than is worth, they can ask their lender for a short sale.

Charles:
If the lender agrees the homeowner lists their home for sale and the lender must approve the sale price and offer the property proceeds go to the lender, and the remaining debt may be forgiven, or the homeowner may be responsible for the remaining amount known as the deficiency. So why would the lender and homeowner agree to this? ’cause it’s less expensive for the lender than a foreclosure and usually less damaging to the homeowner’s credit since they are avoiding a foreclosure. If you’re buying a property from a short sale, prepare yourself for a long process that will last several months, especially if there is a divorce between the homeowners. In that situation, not only do you need the property sale to generate a legitimate offer, but you need the bank to agree to that price and not just one, but two homeowners agree as well. So what are the differences between a short sale and a foreclosure?

Charles:
Short sales are initiated by the homeowner, and the homeowner handles the property sale and controls the process. And during a foreclosure, the process is initiated and control by the lender who takes legal action to reassess the home, and the bank will then sell the home itself after the foreclosure has been finalized. As an investor, buying a home via short sale is long and more time consuming. However, usually the properties are in better condition when compared to a foreclosure where homeowners stop performing any maintenance since they are losing the property. Now, if you are a homeowner going through a short sale and the bank is holding you responsible for the deficiency, it is in your interest to obtain the highest price possible as every extra dollar you receive from the sale is one less dollar that you need to now pay the bank. And the damage to the homeowner’s credit is less severe with the short sale, but it is still damaged.

Charles:
During my research, I found that a short sale remains on your record for four years compared to seven years for foreclosure. So a short sale is a sale that is initiated by the homeowner when they owe more than the sale price of their home. And short sales are less harmful to borrowers than a foreclosure, and it allows sellers to minimize their credit damage while lender avoids the cost and hassle of repossession. Of course, the best situation for both parties will be to hold the property until the sale price exceeds the mortgage payoff amount. But if the borrower is unable to make payments, a short sale might be a viable option. So I hope you enjoyed. Please remember to rate, review, subscribe to make comments, instances, or show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses of mentoring programs@syndicationsuperstars.com.

Charles:
That is syndication superstars.com. Look forward to two more episodes next week. See you then.

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