In Denver, short sales make up a prodigious percent of the sales in the real estate market. Varying by each area, short sale transactions can consist of almost 50% of the entire market.
Don’t know what “short sale” means? Let me help. A short sale is when the homeowner sells their home for much less than their mortgage value. Unfortunately, homeowners these days find themselves in the unfortunate situation where they find out their home value has vastly decreased. With this and the expenses of selling a home, these days means the only way a seller can actually sell his home is to bring money to the closing table.
A few buyers have the cash to bring to the closing table, but unfortunately, many don’t. If this does happen, the homeowner has to make the final ultimatum. Should they turn to a short sale or sadly turn in their keys to their bank and let the bank foreclose their home?
To obtain a short sale, the homeowners has to contact their bank, provide evidence, a hardship letter, income evaluations, and finally find a buyer who wants to wait while the bank goes through these tedious steps to have the short sale approved.
Take it from me, this is not the shortest process. I advise you to get comfortable if you decide to go down this route. Funnily enough, the term only refers to the amount the seller is actually “short” on from being able to sell rather than the length of time it takes to actually process and close a short sale.
Both seller and buyer may be overwhelmed by this elongated process and all the work involved. Sometimes the seller may believe the better option is simply to have their bank foreclose their property. While in some instances this might be true, but there are definitely long-term advantages for closing a short sale rather than letting the bank foreclose your home.
Still confused? Let me give you some examples.
Mr. Lion has a home with a mortgage balance left of $220,000 and the market value is currently $150,000. Mr. Lion decides to move forward with letting the bank seize and foreclose his home. The bank who currently holds his mortgage facilitates all the legal procedures needed to foreclose his property, all which are pricey. Mr. Lion is then promulgated and his home is foreclosed and is off to be sold as a REO. (Real Estate Owned)
Eight months later, the bank finally sells Mr. Lion’s home. Unfortunately, they are only able to sell it for $90,000, 60% of the original value. The deficiency is now $130,000 and the bank has decided to slap on some legal costs of $15,000 and another $5,000 for asset preservation costs making the grand total $150,000. 30 days later after being notified of his house sale, Mr. Lion decides to look at his credit report.
On Mr. Lion’s report, he sees the mortgage trade line declares, “Foreclosure” and his balance of $150,000. Because Mr. Lion chose foreclosure vs. short sale, his journey down recovery lane has been severely botched. He will forever have a foreclosure on his credit report and has a much larger deficiency balance. The bank will then report this on his credit card report as well, giving another blow.
Again, Mr. Lion has a home with a mortgage balance left of $220,000 and the market value is currently $150,000. Mr. Lion wants to short sell his property. His real estate agent manages to find a buyer who offers $120,000. After evaluating the buyers offer and the fiscal tribulation of Mr. Lion, Mr Lion’s permits to accept the short payoff of $120,000 therefor leaving a deficiency balance of $100,000.
Make sense now? When making the decision to sell your home, you must remember the consequences of each action. Though the ultimate decision should be clear. A foreclosure will invariably be on your credit report and will typically cost more.
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