It is important to understand the benefits of a short sale to each of the parties involved. Why would a seller want to cooperate? Why would a lender accept less than what is owed? Why would a buyer want to wait for a short sale to be approved? Why would an agent take on the potential headache of a short sale?
How do sellers benefit from Short Sale?
- Closure. People facing foreclosure are inundated with collection calls, threatening letters, and visits from the county sheriff’s deputies. They no longer want to answer the phone or doorbell, and they dread walking to the mailbox to check the mail. Selling a property before a final foreclosure action brings the unpleasant calls, letters, and visits to an end. The seller can move on with their life.
- Dignity. Imagine the shame of having sheriff’s deputies forcibly move you out of what was once your home. Imagine the awkward looks of the neighbors as you hurriedly throw a handful of possessions into a waiting car or truck. Imagine seeing the lender’s locksmith changing the locks as you leave the property for the final time. A short sale allows the seller to have a normal closing and a move on their own schedule. In most cases, the neighbors won’t know that a seller sold their property via a short sale.
- Credit. A short sale, while damaging to a person’s credit, is less damaging than allowing the property to go to foreclosure.1 Settling the debt and ending the delinquent payments allows a person to stop the damage and start rebuilding their credit sooner. It is important to note that a short sale may affect a borrower’s credit for at least seven years because lenders might report that a loan was settled for less than its balance. A seller may be able to convince the lender to include a letter of explanation in the credit file that outlines the extenuating circumstances that caused the short sale. This can soften the blow to one’s credit.
- Prevent a Deficiency Judgment. If the seller opts for a deed-in-lieu of foreclosure, they might surrender the property without an agreement on the lender’s loss. If state law permits it, the lender may elect to pursue the seller for the remaining balance after the deed is transferred. If the seller allows the property to go to foreclosure, in some states the lender may have the right to pursue the seller for the remaining balance after the foreclosure sale. A short sale involves a negotiated settlement, whereby the seller and lender reach an agreement on the loss. In most short sales, the lender will forgive the remaining debt.
- Avoid Bankruptcy. A mortgage loan is typically the largest debt instrument a person must service. By selling the property via a short sale, a person might avoid bankruptcy altogether. A bankruptcy would affect all of the seller’s creditors and be more damaging to the seller’s credit rating.
How do lenders benefit from Short Sale?
- Avoid Excess Inventory. Banks are in the business of lending money, not owning houses.
Many banks are already saddled with far more Real Estate Owned (REO) than they can handle. In many cases, lenders prefer to allow properties to be sold via a short sale.
- Purge Toxic Loans. Nonperforming assets hurt a lender’s balance sheet. Bank executives face pressure from shareholders to keep the books free from toxic assets. While forgiving some of a defaulted mortgage loan is financially difficult for a bank, the lender then receives a tax write-off that can offset profits.
- High Costs of Foreclosure. A June 2007 report from the Joint Economic Committee of Congress stated that the average foreclosure results in $77,935 of costs to the lender, borrower, government, and neighbors. The Joint Economic Committee calculated that the lender will spend $50,000 of that amount on legal fees, court costs, appraisals, maintenance, rehabilitating, insuring, and reselling the property to a third party. Lenders know that taking back properties via foreclosure often results in more losses, so they are willing to permit short sales as a cost-cutting measure. The Joint Economic Committee calculated that the borrower has a typical loss of $7,200 in foreclosure, including legal costs, moving expenses, and loss of equity.
Neighbors typically suffer a loss of $1,508 due to a decline in area property values. On average, the local government loses $19,227 from a foreclosure.3
How do buyers benefit from Short Sale?
- Bargains. A patient an opportunistic buyer may be able to purchase a property below fair market value.
- Equity Creation. A buyer of a short sale may have purchased a property worth inherently more, thus creating equity that may benefit the buyer now or in the future. Many short sale properties fall into disrepair, and equity can be created by renovating those properties.
How do real estate agents Benefit from Short Sale?
- More Sales. Agents who refuse to list distressed properties for sale may cost themselves thousands of dollars in lost commissions. Agents who become short sale experts, or who outsource the processing of a short sale to a competent third party, will generate many more listings. In today’s market, any sale is a good one.
- More Homebuyers. It is a buyer’s market, and many buyers specifically are looking for the bargains that may be created by distressed property. Those buyers may bypass certain agents and go to those real estate salespersons who have short sale listings. Also, if an agent helps a grateful borrower sell their property via a short sale, it may only be a matter of time before that person (or their family or friends) calls upon the agent to help them with a new real estate need.
- More Investor Clients. Real estate investors and landlords are enjoying the bonanza of distressed properties. Investors typically buy (and sell) multiple properties, so an agent with numerous short sale listings may generate many sales with just one client. Some agents prefer to deal with investors and landlords because of their repeat business and quick, unemotional decision-making. Even if an agent refuses to handle short sale listings, that agent will likely represent buyers interested in acquiring properties facing a short sale.
