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Understanding Short Sales and Why They Take So Long

By Tiffany Raiford

Anyone who pays any attention to the real estate market is aware of the term, "short sale." A short sale is a relatively simple term, but it can be difficult to understand for those who have not been through the process of a short sale or those who do not work in the banking industry. Not to be confused by the name, a short sale is seldom short. When you enter into and short sale agreement in North Carolina, you must understand that the process could take longer than you anticipate.

What a Short Sale Really Is

A short sale, put simply, is what happens when a homeowner can no longer afford to live in a home. Say you are faced with the realization that foreclosure is imminent. By speaking to your lender, you have the option of choosing a short sale instead of a foreclosure. The term short sale comes from the fact that your mortgage lender agrees to allow you to sell the home for less than what you owe on the home rather than facing foreclosure.

Advantages of a Short Sale

Understanding precisely what a short sale is means understanding the benefits one offers to homeowners. First and foremost, when your home is in jeopardy of foreclosure, your credit score is in jeopardy of being severely damaged. When foreclosure occurs, your credit score drops significantly. This makes it difficult for you to obtain other loans and lines of credit.

Additionally, many buyers find their interests piqued by the idea of a short sale. For them, it entails finding a home that might have been out of their price range if it was selling for the price it is worth. This means buyers with a smaller budget receive more house for less money. Furthermore, the chances of a short sale home being as damaged as many foreclosures is smaller. Oftentimes, families who lose their homes to foreclosure will damage property by taking cabinets, appliances and even light fixtures. When a house is a short sale, this is less likely.

Finally, short sales are often advantageous for homeowners because you are not likely to owe the remaining balance of your loan to your lender. While your job is to work with your bank to discuss the details of your short sale and come to a financial agreement, typically you can avoid paying the remainder of your loan.

Understanding Time Frames Regarding Short Sales

The term short sale does not mean a short closing. In fact, it can mean just the opposite, as many short sale contracts take months to close. The problem typically lies within the bank holding the mortgage. If you are a buyer who submits an offer on a short sale home and the seller agrees to your offer, you still have to wait on the bank to agree to the terms; and that's not always easy. Banks are losing money with a short sale. Any particular bank at any given moment has every right to say no to your offer, to request more money or even to say that your offer is good, but only if the sellers can pay more money. If the sellers cannot pay more, your offer might not be any good.

Banks dealing with short sales require short sale packages, and many of those packages take weeks to review. Here is how it works: Banks require that you and the seller submit very specific, very detailed information in a short sale package. You cannot control the amount of time it takes sellers to provide their information. You also cannot control the amount of time it takes a reviewer at the bank to get to your paperwork. It could take weeks. At that point, some of the information you submitted might be invalid. This means the bank will call you and require updated information, such as current bank statements since the ones you provided were from four or five weeks ago.

The short sale process also takes a long time because banks often want to see if any better offers come through. Since they are losing money in this deal, they are not necessarily excited to sit back and accept the first offer that comes through when someone else might be willing to pay more. Finally, if you are taking out a loan to pay for this short sale, you have just involved a second bank. This could extend the period of time in which your short sale happens by another few weeks.

Depending on your circumstances as either the buyer or seller of a short sale home, understanding the process is necessary, especially if you are a buyer. As a buyer, understanding the complex nature of a short sale might help you decide that this option is off the table for you, as you simply do not have the kind of time required to deal with the terms of a short sale agreement.

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