One of the worst things that can happen as a home buyer is going through a foreclosure. If your mortgage has become an issue or you can no longer afford your home for any reason, you may want to consider a short sale.
A short sale is when a house sells for less than what is owed on it and the home owner can't afford to pay the left over amount. The lien holder agrees release the lien and accepts less than the amount owed by the home owner.
While short sales are used as an alternative to foreclosure, neither one is an ideal situation. Short sales do have some advantages as well as disadvantages, and ultimately it's the home owner's decision to decide if a short sale is the route they would like to take.
As the buyer in a short sale deal, you will be buying directly from the lien holder/lender, not the home owner. Often time short sales are an opportunity for you to get a great deal.
For instance, say the owner of the home owes $350,000 on the mortgage, you may submit an offer for $250,000 and if the lien holder accepts this offer, you just got an unbelievable deal! Buyers are usually the only real winner in short sales due to this.
Usually home owners are doing a short sale as an alternative to foreclosure and as a last resort. If you're about to enter the foreclosure process, this is the time to take a short sale into consideration.
The only real advantage of a short sale is not having to go through foreclosure. You also won't be liable for any uncollected amount that wasn't received during the short sale.
However, it will probably be difficult for you get another house mortgage, since lenders will see you as a significant risk due to the short sale. Your credit will still be negatively affected due to the missed payments, but this is much better than the damage a foreclosure would do.
Another disadvantage is that you may have to pay taxes on the difference between what was owed on the home and the amount it sold for. The money that is forgiven by the lien holder may be considered income.
The lien holder is put in a difficult position with a short sale. They have to make the decision of trying to get as much money as they can for a property or go through the foreclosure process with the home owner.
Usually, the lien holder ends up taking a loss
They've already lost out on the missed mortgage payments and they will most likely not be able to recoup the amount that was owed on the property.
The foreclosure process is generally time consuming and costly depending on the circumstances. Because of this, sometimes lien holders prefer to do a short sale to minimize costs and to avoid a long dragged out ordeal.
If the lien holder is a bank, the property is seen as excess and Is basically just collecting dust and not making them any money. And delinquent accounts look bad on the books.
As you can see, short sales have their advantages and disadvantages. If you're buying a short sale home, you have potential to get a really great deal.
If you're the home owner, a short sale might be the best available option if you're behind on payments and want to avoid foreclosure. If you're the lien holder you have to decide if it's worth going through the foreclosure process or if a short sale is the way to go.