There’s a lot of buzz going around these days where the words “short sale” and “foreclosure” are being tossed around, but I’ve noticed a disturbing trend in some of the people I talk to who are confused about these terms. Many don’t really know what they mean, or worse, they think they’re the same thing. Given the state of the economy today, this is worth a little clarification.
Simply put, a short sale is when a lender will accept less than the amount owed on a mortgage when a property is sold. Why would they do this? The truth is banks are in the money business, not the real estate business. If it can be shown that they will end up with a piece of real estate falling into their laps if they don’t take steps to allow its sale, they’ll most likely do it and cut their losses.
If for whatever reason the value of the property is less than what is owed at the moment a homeowner needs to sell it, a short sale is the most likely strategy. When this happens, the homeowner ends up getting nothing from the sale except the opportunity to preserve their credit and a perhaps little pride.
Homeowners end up in this situation in a variety of ways. A common scenario is one where they default on a mortgage and end up owing back payments, late fees, property inspection fees, attorney fees and so on, quickly eating up whatever equity they might have had on the property.
If they are unable to bring the account current, the lender will have no choice but to foreclose, which is a process by which they repossess the property due to the lender’s inability to comply with their agreement. At that point, the lender will most likely try to sell the property at an auction to recoup their losses.
As sad as this scenario can be, it presents some great opportunities for investors who are trained in executing short sales or transactions at the pre-foreclosure or foreclosure phases. There are also opportunities for Realtors® who are trained in dealing with bankruptcy specialists and loan mitigation representatives. Lenders will often prefer to work with real estate professionals in negotiating short sales for clients. Short sales expert Will Weaver of Royal Oak, Mich., explains why:
- They’re licensed by the state.
- They adhere to a code of ethics.
- They carry errors and omissions insurance.
- They have too much at stake to cut corners. As licensed professionals, they aren’t likely to commit fraud that could put their entire careers at risk.