Approved for a Short Sale!

Think you beat the bank? Think again!

In the end… they get it all.

With the changing times, the “conventional” has materialized into the “non-conventional”. The same holds true for real estate closings… and the underlying fundamentals surrounding some of these real estate transactions.

The “Short Sale”… a product of the sub-prime market crash and housing market demise of the late 2000s is a tailored transaction whereby a homeowner, who as a result of financial hardship, is in a position where he/she cannot make their mortgage payments… and has little or no equity in the premises… arranges, through negotiation, to sell the home to a bona-fide purchaser, and have the bank agree to accept LESS (short) than the amount owed on the outstanding mortgage. Pitched as an alternative to foreclosure or bankruptcy filing, people are led to believe that by arranging for the lender to accept less than the outstanding balance owed on the loan (from the proceeds of the sale), that they in someway reaped the benefits of a transaction created to cater to the needs of the needy… and silence the commanding voice of these mighty and powerful banks.

Not exactly the case.

When an individual becomes delinquent on payments on his/her mortgage, the Promissory Note (commercial paper held by the Lender to enforce the payment) becomes a “non-performing receivable asset” on the lender’s corporate books. By allowing the short sale, this “non-performing” note is converted into immediate “cash”, thereby increasing the Lender’s stock par value. In addition, the difference between the diminished amount that the lender receives via the short sale… compared to the actual balance owed… is usually “written off” by the lender as bad debt. In short, their stock value and corporate books are potentially benefited by this scenario.

As far as the lender losing money, it must be realized that when one initiates making payments on their mortgage… from an amortization standpoint… most of the payments… for at least the first 10 years of the loan… are allocated towards INTEREST that the bank receives/keeps… NOT towards a principal reduction on the outstanding balance owed. So the lender actually makes back most of the money it has lent in the form of the interest payments it received while the mortgagor was still timely/consistently making their payments. By accepting a lump sum-lower payment down the road, it can almost be construed as the bank receiving a “make-shift balloon payment.”

Moreover, simply because the bank deems the title to the property “freed of the loan,” so as to allow the purchase to occur, and title to be conveyed free and clear of any liens, to the prospective purchaser, the lender still reserves the right to sue the Seller for the entire outstanding balance due and owing on the loan in the form of a “deficiency judgment.” In addition, by allowing the Seller the “premiere option” of avoiding an outright foreclosure, the lender avoids taking ownership of the home… whereby the lender, as the “now owner,” would be responsible for maintenance, up-keep, taxes, potential squatter situations, and the like. Lastly, a short sale, contrary to popular opinion, does detrimentally affect one’s credit score. The impact may not be as significant as that of an outright foreclosure, but creditworthiness is negatively impacted nevertheless.

In conclusion, as the saying goes nobody gets something for nothing. So if you think that you are outright beating the bank by being approved for a short sale… think again.

DISCLAIMER: THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TO BE RELIED UPON AS LEGAL ADVICE. NO ATTORNEY CLIENT RELATIONSHIP IS CREATED BY THIS PUBLICATION. AN INDEPENDENT LEGAL OPINION SHOULD BE OBTAINED BY THE READER.