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SHORT SALES v. FORECLOSURES: COMMON QUESTIONS ANSWERED:
Are you a realtor?
With the changes that have and continue to take place in the market, new and unfamiliar situations are more and more common. Two terms that I am sure you have heard are "short sale" and "foreclosure." Below you will find a brief overview of what these phrases mean along with some additional, useful information regarding same.
WHY TALK ABOUT SHORT SALES AND FORECLOSURES?
Realtors and lawyers alike want their client's real estate transactions to be trouble-free -- or at least minimally troubling. When you see the words "Short Sale", "Foreclosure", "Third Party Approval required" or "Bank Owned", do you get nervous? You shouldn't.
Today's market is making these types of transactions more and more common. Having some basic information about what these transactions and words mean and what you and your clients should expect when encountering them, will only serve to protect your clients and you from common pitfalls which can and do arise in dealing with these situations.
Here are some common questions:
What is a Short Sale?
Put simply, a Short Sale is a real estate transaction which requires a mortgage holder to accept less money than is owed to them in order for the closing to take place. Short Sales are becoming more common as home values have fallen and, thus, the homeowner's equity diminishes.
What is the difference between a Foreclosure and a Short Sale?
A Foreclosure is a formal, legal action (or lawsuit) instituted by a lien-holder, usually a bank, when a mortgagee fails to make payments. The ultimate outcome of a Foreclosure is to force the sale of a home to recover the amount due to the lien-holder. Once the sale takes place by a County Sheriff, any amount due to the lien-holder which is still remaining continues to be the personal responsibility of the former-homeowner. In contrast, a Short Sale is a business decision made by a lien-holder to accept less money than is due to them. Any amount "forgiven" by a lien-holder is usually considered a "gift" or "income" to the homeowner, as no further personal obligation remains once settlement occurs
Do you have to be in Foreclosure to have a Short Sale?
Not necessarily. A Short Sale is simply a request to accept less money than is owed to a lending institution. The request is made when a homeowner desires to sell their home and can not sell it for an amount which will cover the closing costs and the amount owed to the lien-holder. The request will generally be granted when the homeowner does not have the financial ability to pay the difference and the home value has decreased by no fault of the homeowner. While the lien-holder's decision to take less money than what they are owed is generally not based upon whether the homeowner is making payments, it can be a factor.
Do I have to tell the public my client is in Foreclosure or has a Short Sale situation?
If you have actual knowledge that a Foreclosure action has been instituted or that the list price of a home will not cover the liens and the closing costs (and the homeowner does not have the ability to pay the difference), you MUST disclose these material facts.
Do purchasers of Short Sales or Foreclosure properties have any risks I should know about?
Yes, and they should always be directed to discuss such risks with a qualified real estate attorney. Generally speaking, a potential purchaser of a Short Sale should be advised that the transaction may not be approved by the lien-holder and, thus, they may not ultimately be able to purchase the home. In that event, they may spend monies which they will not be able to recover. Also, they must be flexible in closing time-frames as the decision making process is both lengthy and wrought with mystery. Conversely, a potential purchaser of a property in Foreclosure must be ready to act quickly in obtaining both a mortgage and being prepared to close on the home, as time is always of the essence to close the transaction before the property is sold by the County Sheriff. Attorneys on the Gold Services approved lists have experience with such risks and are always available to your clients for advice in these regards.
Isn't this something only the Lawyers have to deal with?
No. To give your clients the best representation possible, you should be informed and educated about the process, risks and subtleties of both Short Sales and Foreclosures. While you should always have your client discuss these issues with a real estate lawyer, your involvement and knowledge will only make such a transaction more pleasant for both you and your clients in the long and short run.
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