The Skinny on Florida Short Sales
The term “short sale” quickly became Florida real estate buzz word just a couple of years ago, giving homeowners a way out when they’re facing foreclosure. After the bubble burst in late 2006, short sales became a common approach for avoiding an impending foreclosure. Although the amount of short sales has gone down considerably over the last few years, they still make up about 10-11% of total real estate transactions, and approximately 22% of all distressed sales.
But what exactly is a short sale? How can the seller benefit from it? And, in turn, how can a potential buyer take advantage of these new opportunities?
What is a Short Sale?
Basically, a “short sale” is an agreement a lender makes with a homeowner to accept less than the amount the current owner owes on the mortgage, by way of a sale. The lender, or mortgage company, in a way forgives a portion of the debt in order to escape total loss caused by foreclosure. The difference between the remainder of the debt and the amount that the property sells for is called a “deficiency.”
The Difference Between Short Sales, REOs, and Foreclosures
There are three types of distressed home sales - Short Sales, REOs, and Foreclosures.
An REO is a bank-owned property that the lender acquired through a foreclosure action. Lenders will frequently sell these repossessed and foreclosed properties for less than the original amount. It’s different from a short sale in the sense that an REO is already owned by the lender, and a short sale is still owned by the homeowner. REO simply means “Real Estate Owned” by a lender, bank, or mortgage company.
In a Foreclosure the owner of the property has defaulted on mortgage payments forcing the bank to make alternative arrangements to cover the deficiency. Usually, once notice has been made to the owner, they have a certain amount of time in order to make up the payments. If not, the property will foreclose and go into public sale and the bank or lender will then sell that property to the highest bidder.
In a Short Sale, the owner of the property sells it according to the lender’s terms.
For the Seller
•It’s better for your credit than a foreclosure: Like breaking a mirror will give you seven years of bad luck, foreclosing on a property will give you seven years of bad credit - a reality which will make financial matters extremely difficult and forcing many people into bankruptcy. A short sale will still smudge your credit score, but will give
•You don’t have to undergo eviction: another troubling element of foreclosure is that if your home forecloses, you have to leave. A short sale provides you with more cushion.
• It Will Still Damage Your Credit: The biggest downside of short selling a property is that, although considerably better than a foreclosure, its still damaging to credit. Lenders don’t often care about why they suffered a loss, they just acknowledge that they did, and it will go on your credit report.
For the Buyer
•You could get a deal: Because of the nature of short sales, buyers will usually be able to pick them up at a discount.
•It’s a waiting game: The fact of the matter is that lenders don’t want homeowners to short sell their property, because it means a loss for the lenders. As a result, they require a great deal of paperwork, take a long time to close, and demand serious effort on the part of the buyer. So, if you’re looking to get a new home from a short sale, expect to be in it for the long haul.
• It could be in poor condition: Odds are if a homeowner is facing foreclosure, then they most likely haven’t invested sufficient time and money into the upkeep of the property. True, you may be getting a great deal from a short sale, but you may have to roll up your sleeves and put in some work to get it into good condition.