A Short Guide to Short Sales: FAQs, Answered
What are short sales and how do they work?
In this article, we’re going to be looking into a popular method of avoiding foreclosure: short sales.
We’ll talk about exactly what short sales are, how they benefit both the buyer and the seller, and we’ll even discuss the drawbacks. Finally, we’ll show you how to find some short sales in our target market: Fargo, North Dakota. If you don’t live there, though, it will still be easy to follow along. We have no doubt that you’ll find this article helpful either way.
First, of course, we’ll tackle the biggest question:
What is a Short Sale?
A short sale occurs when a homeowner sells their house for less than what’s remaining on the mortgage. They sell it at a loss, so they’re “short” the remaining amount.
For example, let’s say you bought a house worth $300k and, a few years into homeownership, you lost your job. To make matters worse, the housing market took a nosedive. Now your property will only sell for $200k — even though you have $250k left on your mortgage.
But the bank still needs you to repay that loan, so you decide to sell the house for $200k to try to pay down as much of the remaining mortgage as you can. The bank might say “you’re $50k short.” However, if you negotiated this situation with your lender, you may be able to get out of the mortgage scot-free, with more of your credit score intact than you would if the foreclosure went through in its entirety.
In order to understand why, it helps to have a rough idea of how foreclosure works.
Quick Overview of the Foreclosure Process: Why It’s Beneficial
- Borrower stops making payments on his/her house.
- After a few months, the borrower receives a notice of default.
- Then, the borrower receives a notice of trustee’s sale, stating the property will be put up for auction.
- If the house doesn’t sell at auction, the bank hires a realty agency to list it as an “REO” property.
- Once the house is sold, the borrower is evicted.
So, using our example, why would the banks forfeit the extra $50k that you owed them?
Because a short sale occurs before that third step, when things can get even more expensive for the bank. It’s going to cost them money to put the house up for auction — and they’d probably get a similar (or even lower) price.
Then, if the house doesn’t sell at auction, they’ll have to worry about listing it as an REO and finding the proper agency to sell the house. More expenses. After that, if the house sells, they have to worry about eviction. If the house doesn’t sell, they have to worry about squatters, property taxes, and maintenance.
This is all one big distraction from their main business, what makes banks the most money: lending.
So, that’s how short sales benefit both parties. The borrower can get out from being underwater on their mortgage, and the bank can avoid the headache of extra paperwork, miscellaneous expenses, and even property taxes.
What Are the Drawbacks to Short Sales?
With that said, why might the original borrower (or lender) not want to go through with a short sale?
First off, you might not even qualify for a short sale. In order to qualify, you have to prove that you’ve suffered a financial hardship. If you haven’t actually suffered a financial hardship, you won’t qualify.
Next, some people might not want to cooperate with their lenders. It’s easy to feel pretty jaded at this point with the entire banking system. The banks approved you for a loan that ended up being way too expensive. You could make the argument it was a “bad loan.” Now you’re expected to work with them?
On the other hand, though, if you get back on your feet, you can buy a house within two years after a short sale. If you go through with a traditional foreclosure, you won’t be able to buy a house for seven years.
Finally, some lenders might not want to cooperate with the distressed owner. The bank is going to crunch the numbers on how much money they’ll make from a potential auction. If it turns out they’d make more money going through with a foreclosure rather than a short sale, they’re going to go with foreclosure. After all, they technically own the house.
How To Find Short Sales in Fargo, ND (And Everywhere Else)
Whether you’re an investor, rehabber, or distressed property owner, we can help you find out the best possible solution for your scenario. Feel free to contact us here.
If you’re interested in doing some house-hunting for short sale deals, though, we’ll also show you one popular way of going about it (but you should keep in mind that we likely have a few properties that you might be interested in).
And, if you remember the first two steps of the foreclosure process we listed above, you’ll know that, when the foreclosure process starts, the delinquent borrower will receive a “Notice of Default.” These have to be recorded in the county clerk’s office, so if you want to remain ahead of the game, that’s the first place to check.
You can go to the “District Court Case Search” for the state of North Dakota, and then navigate to “Cass County,” (under “East Central District”), you can then search by date (we recommend using this year to date) for foreclosures. We can’t promise that all foreclosures and/or notices of default will be listed there, but the gist remains the same: Check the public records.
There are also various websites, like RealtyTrac and ForeclosureListings, that do some of the work for you.
Conclusion: Short Guide to Short Sales
Short sales occur when a distressed property owner sells their property for less than what’s remaining on the mortgage.
It can save both the lender and the seller a big headache. The lender won’t have to put the property up for auction, list it as an REO if it doesn’t sell, and evict the current owner. The seller won’t have to take a big hit to their credit if it goes all the way through to foreclosure, and they can get out from underneath the underwater mortgage relatively scot-free.