Real Short Sale Scenario

The process

When a borrower falls behind on their payments the loan is usually sent to the lender’s loan loss mitigation department. Most lenders also consider short loan payoff sale requests in their loss mitigation departments.

Your chances of success with your lender improve if your communications with them is organized and complete. Your contact with your mortgage lender’s loss mitigation department should be professional. You’ll want to send them the appropriate documentation and provide them with any additional information that they may require.

Keep in mind that lenders will approve a short sale as a last resort to avoid foreclosure. If a home was purchased at the height of the market and has depreciated considerably, the home may be “upside down”, or is worth less than is owed. The lender may consider a short sale. The same is true for a property was recently refinanced at 100% or on an option arm leaving the property without equity.

Keep in mind that lender is not in a position to manage property they are in the lending business. A home, while it’s sitting vacant waiting for sale, is accruing costly insurance premiums, taxes, repairs and bringing in nothing. The lender is losing even more because the lost interest they could be receiving on their asset. They have their money invested, but are making nothing from the investment until the property sells. If a short sale can be accomplished, their money is returned and they are no longer losing money on the investment. In a short sale the bank may even be willing to finance a new owner, making it a win/win for all parties.

A real life short sale scenario.

To help you to better understand the short sale process, we have assembled a recent case study for your own review and study. The scenario will help you better understand the reasons and motivations behind a short sale transaction.

Alex and Rita owned their 2,500 square foot ranch home for 7 years. The year prior to their Alex losing his job, they had obtained a new mortgage on the home in the amount of $240,000 with their bank.

Over the course of the past several years, the home had suffered from deferred maintenance on the walls, doors, carpet and exterior. Given the softness of the real estate market and their desire to vacate their home, they initially they put the home on the market at $220,000. 75 days on market produced no offers, so the price was reduced to $205,000. After a number of weeks on the market, several offers were received, one at $195,000 and the other at $197,500.

The lender involved in this short sale counter-offered at $200,000, based upon the expectation the their net proceeds would amount to no less than $194,500, after seller-related closing costs, commissions and past due property taxes. The buyers agreed to increase their purchase price from $187,500 to $190,000 and the Sellers received a letter of investor acceptance, outlining that the loan would be considered “paid in full”, with the remittance of the net proceeds.

The lender, in this actual transaction, accepted a loss of $52,095 or a 23% loss on their total balance owed. This home was listed at the reduced list price on September 21, went under contract on October 22 and closed on November 15, just one month before the scheduled foreclosure auction date.