In today's marketplace, foreclosures and home sales contingent upon a "short sale" is ever growing. There are many different kinds of foreclosures, and in this article, I want to touch on the preliminary stages of foreclosures. Pre-foreclosure and homes that are subject to "short sale".
What is a Pre-foreclosure?
A pre-foreclosure is the procedure in which the lender or mortgage holder will allow a mortgagor to avoid going into foreclosure by selling their property for less than outstanding balance of the loan, or "short sale". This is something that the homeowner and their lender need to work out early, before the home is marketed for sale.
If the homeowners do not talk with the lender, and market the home for sale, they may need to negotiate a short sale with their lender when an offer is presented. And sometimes that is too late.
(Example: John has a home that he can no longer afford. He decides to sell his home because of his financial status. In the past, he had borrowed against his home to purchase a truck he needed for work. His current mortgage amount is now $244,000 on his home. Reviewing comparable properties that have sold in his area, he realizes that his home is worth $229,000. If he sells the home for $229,000 and does not have the $15,000 to payoff his mortgage in full, he will not be able to sell the home with a clear title. There are also other fees that go along with the sale of real estate, including title and escrow fees, attorney fees if applicable, a portion of unpaid property taxes, notary fees, delivery fees, document preparation and recording fees, state transfer fees, and marketing fees. Now it is now up to the lender to decide if they will negotiate on that remaining dollar amount owed. Because John owes more on his home than it will sell for, the sale of his home is at the discretion or the bank.
If, using the example above, a buyer submits an offer for the full listed price of $229,000, and the homeowner accepts, that buyer needs to be made aware that the seller will be negotiating with the bank and involves a risk.
Buyer Risks
The buyer risks not knowing if the title will be cleared for a legal sale, does not have a definite closing and occupancy date, will probably need legal counsel, and must deal with the situation of not knowing if the seller's lender is going to work with the seller on resolving the issue. This could result in the buyer potentially not being able to purchase the property.
Seller Risks
The seller risks falling into foreclosure, as a result of not being able to negotiate a settlement, accruing interest and penalties that go along with the default of the mortgage, and much stress. In addition, the IRS may get involved with "short sale" properties because they are seen as a relief of debt and may be treated as income to the owner.
Every situation is different when dealing with pre-foreclosures and "short sales" of properties. If you are in a similar situation, or know your sale may be subject to a short sale, the biggest tip I can give you is - Don't run from it! Talk with the lender and try to work out the best option for everyone. Many times the lender will hold a note or forgive some of the interest owed in hopes to regain their borrowed money.
