With our economy and real estate sales still in the doldrums, the majority of real estate sales in the California area are termed as short sales. But what are real estate short sales?
In the real estate industry, the term Short Sale seems to have only re-appeared in the last few years. The title is very confusing to some people, including some Realtors® themselves.
When we use the phrase Short Sale, it conjures up all sorts of ideas in our mind. I have been asked if it is anything to do with the length of time the sale takes, or whether there is a shortage of that type of home, and many other impressions of what this type of sale really is.
A real estate short sale is brought about when a home owner cannot afford his mortgage payments any more, and then finds out his home is worth far less than what it was worth just two or three years ago when he bought it. He has no option but to go to his lender and explain the situation to them. A real estate agent is usually called in to negotiate a settlement amount that the bank will accept to pay off the home owner’s debt, so the bank can get it off their books. The bank eventually agrees to a price and the property is put on sale for the price the bank is prepared to accept – usually many thousands of dollars short of what the home owner owes – hence the term Short Sale.
At some stage the homeowner contacts the bank or lender to advise them that he is in financial trouble and cannot keep up with the monthly payments. The homeowner often has to stop paying his monthly payments and his account goes into delinquency.
If the homeowner has a good agent, he will approach her and tell her of the situation. The agent will subsequently try to contact all interested parties – there may be a second mortgage on the home, or a couple of liens. All parties are advised of the situation with this lender and mostly everyone involved agrees to accept lower amounts than are owed to them – eventually. Typically, everyone agrees to accept a payment that is short of the amount owning and a Short Sale is then introduced to the real estate market.
Why are There So Many Short Sales?
Everywhere we look these days, there seems to be Short Sales all over the place. We do not see too many regular, traditional sales listings like we were used to seeing. Why is this?
The main reason is that during the recent economy problems, so many people have been affected by the downturn. Their companies have laid people off till business increases, other companies simply get rid of people under the guise of “downsizing.” Many folks have simply had their weekly working hours reduced, some even put on part time. Whatever has happened in the workplace it has affected most of the general public, and has had a big time knock-on effect.
With many workers now taking home a reduced a pay-check, they can no longer afford what they could before. They are now having a job to meet the monthly mortgage payments, pay for rising grocery store prices, pay for increased gas prices, and so the list goes on.
When a family has a reduced income, they spend less on grocery items, buy less gas and try to make it last longer, lay off their weekly yard maintenance service and do it themselves, spend less on eating out and cook at home. All the services they are cutting down on are therefore going to suffer from the knock-on effect – not from one family, but from hundreds in the area that are in the same boat. Collectively, the cutbacks they are making will affect the local economy and then local businesses start to suffer and the cycle continues as it builds into serious concerns.
Having considered the above, our typical family will start to have problems making the monthly mortgage payments due to the lower pay-check. Eventually they stop paying and the arrears start to build up. Of course, they hope and pray that things will improve soon, so they hang on for as long as they can clutching to that hope.
The situation rarely improves though and they are forced to sell their homes. They call in a real estate agent for help and advice, only to be advised – to their horror – that their home that they bought for $500,000 four years ago is now worth around $295.000. They are devastated, of course, but they have no other choice than to try and sell. But they owe far more than the home is now worth. This is known in financial circles as being “upside down.” Let’s say they still owe the bank or lender $450.000. How are they going to settle their mortgage when they are only likely to get $295,000 for their home?
The real estate agent approaches the bank for them and explains the position and hopes that the bank will play ball. Usually the bank has to settle for much less than is owed, and the real estate agent is contracted to conduct the sale – a typical Short Sale – known because the lender is agreeing to sell the property for an amount SHORT of what is owed.
Multiply this one family by several thousand in your area, and you have the answer to the original question… why are there so many short sales?
Will a Short Sale Affect My Credit Rating?
The short answer is yes and no!
If you have fallen way behind in your mortgage payments and are in what is commonly known as default or delinquency, then the lender will almost certainly report your arrears to the three credit bureaus. This means that your credit history will now be tagged with this “failure to pay,” and as a result your credit history will be tarnished and your credit score will indeed go down.
If you have managed to keep up with your monthly payments and have kept the bank informed of your financial status, they have no reason to report anything to the credit bureaus as you are not yet in default – because you have worked out a payment agreement.
If you can arrange with the bank to accept a short sale agreement because of your situation – you will have to send a letter proving hardship etc. – and can continue to make payments, you are likely to come out of the transaction unscathed.
The most important advice that most people do not adhere to when they run into trouble is “they do not go to their lender and tell them about their financial position.” This is one of the first things you should do. You may have a caring lender who is able to renegotiate your loan resulting in much lower payments – thus allowing you and your family to keep your home and not lose it.the continuum