Short sales serve as another means of avoiding foreclosure in today's market. A short sale is when a borrower owes more on their home than it is worth and, in an effort to minimize damage to their credit, compromises with their bank(s) to take less than they owe. It is often in the bank's interest to agree to the short sale if they stand to lose more by proceeding with foreclosure. However, banks have begun to make obtaining a short sale more difficult for homeowners, frustrating many and preventing some short sales from taking place.
Last year 12-18% of all national home sales were short sales, and in areas hit the hardest by the real estate bust such as Miami and Phoenix, up to a third of all properties on the market were underwater. Experts argue that 5-10% of transactions taking place today should be short sales, but that actual number has become much lower recently.
This very low statistic does not reflect the attempted number of short sales, which are significantly greater in number than those which close successfully. In part, this is because many borrowers and their representatives find the short sale process tiring, with delays and lost paperwork often slowing down the process. A year ago, banks averaged four and a half weeks to answer a short sale request. They are now taking at least nine and a half weeks to make a decision on the same package.
Initially, short sales were preferable to banks because they offered an opportunity for the greatest return on their loan. Both borrowers and lenders looked on short sales favorably in the past; for lenders they cost less, and for buyers under financial stress, they're less damaging to credit than other options.
However, with signs of economic improvement over the last few months, are now more reluctant to go through with short sales. Additionally, banks now have more leverage in the short sale process because their profits are improving, and they have more access to capital.
The argument from many lenders now that they have more stable financial backing is that they have the right to receive the money they are owed from borrowers. Short sales obviously do not provide such full repayment.
Experts and homeowners alike are calling for a more organized and structured system to ensure a fairer, easier process when trying to obtain a short sale. Federal guidelines have been proposed as the situation has gotten worse, and rulings over the summer helped establish which types of short sales would be deemed acceptable, but many argue that more must be done. Short sales have benefited hundreds of thousands of struggling homeowners, and with so many homes still underwater, their viability as one of several options should not be dismissed.
We have much experience effectively going through the short sale process at P&P Law, and we will work with your lender to try to save your credit by allowing you to sell your home. Please feel free to contact us with any questions regarding the short sale process or to schedule a free consultation.
