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Understanding Short Sales

The recent decline in property values has created many challenges for real estate agents and homeowners alike, but a “Short Sale” could be the key to a happy ending. One of the biggest misconceptions about short sales is that they are difficult and not profitable. As a result, many agents avoid them. In fact, while a short sale does indeed help a homeowner tremendously, it is also highly beneficial for the real estate agent: it creates opportunity for an increased listing inventory, generates a higher commission than normal transactions, and most importantly, adds exceptional value to his/her service. The nationwide rise of defaulted mortgages and foreclosures is an opportunity for any real estate agent to play a part in easing the strain of the current housing market. After all, better market conditions benefit us all.

So, what is a short sale? A short sale is a loss mitigation solution. The easiest way to explain a short sale is this: when you go into a seller’s house and ask the magic question, “how much do you owe on your home?” the answer is more than what the current value of that home is. Very simply put, a short sale is when the value of the mortgage is greater than the value of the property.
It is said that 90% of homeowners do not understand the difference between a foreclosure and a short sale, and many agents wonder the same thing. A foreclosure is the process of the bank taking back ownership of a house due to the homeowner’s inability to pay their mortgage. The home is now an REO or bank-owned property, and the lender will sell it for the listed price. A short sale, on the other hand, is sold by the homeowner before a foreclosure takes place. The listing price is determined by broker price opinions, recent comps in the area and the condition of the home. And ultimately, in a short sale, the lender agrees to accept less payment than what is actually owed to them.

By definition, any homeowner that is two months late on their mortgage payment and can also demonstrate the inability to pay their mortgage would be considered a short sale candidate. The homeowner is considered pre-foreclosure when the bank officially sends a notice of default or a notice that they’re taking legal action against the homeowner to collect the debt. Contrary to what most agents believe, a short sale can still take place during the foreclosure process. There are only two reasons that a homeowner is not eligible for a short sale:

The foreclosure has already taken place and the home is up for auction
The homeowner files for bankruptcy

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