Saturday, June 16, 2012 / by Nathan Clark
Short sales in theUnited Statesare increasing at a pretty sharp rate – up 16 percent nationwide in the first quarter of 2012, and 25 percent higher than the same period a year ago.
The numbers prove what the anecdotes have been revealing for a little while now: Lenders are realizing that they’re better off doing a short sale rather than going through an entire foreclosure process. There are plenty of reasons why this is so.
First off, with a short sale – a sale of a home for less than what is owed on a mortgage – the lender in question will know up front what kind of loss they’re going to take on a home. If they are owed $100,000 on a mortgage and they approve an $80,000 sale, their loss is $20,000.
On the other hand, going through a foreclosure process can be a lengthy, and therefore expensive, ordeal. Paperwork, legal fees, court costs, etc., and the best they can do is end up with the home when it’s all said and done. Then the bank has to sell the home, for which there is no guarantee it’s going to go for what’s owed on it, AND they have to pay closing costs and real estate agents’ commission.
Obviously, they’re increasingly willing to cut their losses by taking them up front and in black-and-white, rather than dragging a risky gray area on for what could be years in a foreclosure case. There are economists and financial experts who are no doubt glad to see this, as the murkiness of what banks are going to do with losses they have yet to take has weighed on the overall economy.
The call has been for the large financial institution to take their lumps now on bad loans and move on. It would appear that’s what they’re now doing. It’s probably in their best interest.
It’s also not bad for homebuyers and sellers.
Buyers can take comfort in the fact that a short sale typically sells at a 21-percent discount compared to the sale of a home that doesn’t have a distressed mortgage. And unlike a home that’s been repossessed by a bank in a foreclosure proceeding, somebody has likely been living in and maintaining the home. The discount is smaller than one might be on a vacant, foreclosed home, but the risk is smaller, too. And getting a $100,000 home for $79,000 isn’t a bad deal.
The other good news for buyers is that the process is usually significantly less time-consuming than it used to be. Banks have started to embrace the short sale path, which means they’ve laid down groundwork and procedures that have helped the process go much more smoothly now than in the past.
For sellers, short sales are a way to avoid foreclosure if that’s where the home is headed. It means they’re not going to get evicted. It means being able to get out of an asset that has declined in value.
But a short sale also typically does less damage to one’s credit score than a foreclosure does. It’s not out of the question these days that someone who’s short-sold a home can buy again in 18 months or so. It’s longer with a foreclosure in your past, and probably 100 to 200 points worse for your credit score.
Also, some institutions have gotten aboard the short-sale train so wholeheartedly that they’re offering incentives to sellers. Getting paid relocation fees, cash bonuses and other incentives on top of having thousands of dollars of principal forgiven can be a pretty sweet deal for someone who wants to get out of an underwater home.
For homeowners who don’t necessarily WANT to sell their home but feel as though they have to, the financial incentives can help take the sting out of the situation. It’s no fun to be forced to sell a home, but banks are helping make it more comfortable than it used to be.
Again, each person’s situations are different. It might not make sense for every buyer, and it won’t make sense for every single seller. But for those who can benefit, the news on short sales continues to be good. The train is rolling and the banks are on board.