A Seller and Buyers Introduction to Short Sales
Perhaps you are interested in learning more about investing in real estate foreclosures or you may even be facing the possibility of your own property being foreclosed. By now you have probably heard the term ‘short sale’ which like the term ‘foreclosure’ has become a way to common Real Estate term in the past couple of years. So what do short sales and foreclosures have to do with lending and borrowing money to purchase real estate? In short, when the purchaser fails to repay the monthly installments on his loan, the lender which is usually the bank, has the right to foreclose on the mortgaged property. This process of foreclosing takes different lengths of time, depending on various laws of where you live. At that time a short sale will often become an important consideration for the person facing the foreclosure of their real estate.
To understand what a short sale is you have to see it in the context of obtaining a loan to buy property from a lending organization like a bank. To obtain such a loan, the borrower has to sign a note and a lien. The note is a personal undertaking to repay the loan at a prearranged method and time whereas a lien is a security document that allows the bank to recover the loan in the event of a default. The lien is the document that gives the bank (the lien holder) the legal right to carry out foreclosure proceedings that usually involve auctioning the property or selling it in some other way.
Here’s how it usually takes place.
The borrower contacts his friendly banker to ask about a loan to buy some property. When all the details are hammered out, he signs the note and lien and the loan is approved.
But in due course, the borrower might not be able to keep up the monthly loan repayments. Especially in times of economic slowdown, there would be more defaults on loan repayments than usual. Thus the bank now has a right to foreclose on the property.
The usual procedure for foreclosure involves the defaulting case being sent to the Loss Mitigation Department of the bank which would attempt to recover the amount outstanding from the borrower. If these attempts fail, then further foreclosure procedures take place. The bank will recover its loan by auctioning the property to the highest bidder.
If there is no bidder, the property comes under the ownership of the bank that now has the right to sell it at any price to recoup its losses.
This is where you come in.
You are a smart investor. You recognize that such tough economic times are really times of great opportunity. This is the most opportune time to buy high-value real estate at huge discounts. One way to do so is to obtain a short sale.
A short sale is where the borrower sells the mortgaged property for less than the outstanding balance of the loan (called the discounted sale price) and turns over the proceeds of the sale to the bank. To do this, the borrower needs the bank’s approval because essentially a short sale is negotiating with lien holders a payoff for less than what they are owed.
But why would the bank agree to sell at a loss? They would if they are convinced that the loss suffered in a short sale is less than the loss of foreclosing the lien.
A short sale is often a win-win situation and something that both investors and those facing foreclosure should discuss with a real estate professional to learn more about.
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