Question

Explain, what are the risks and rewards to a (i) Buyer (ii) Seller (iii) Lender and (iv) Real Estate Agent of a Buyer buying a property from a short sale. 

Answer 1

“A short sale in real estate is a sale where the revenue received from sales of the property falls short of the outstanding secured by a lien against the property.”

1. Buyer: The benefit is the buyer sees is getting a property at a lower cost but the buyer is at the most risk, as though he sees a lucrative offer and a good buy.

There are unforeseen expenses as follows:

• Maintenance & Hidden expenses: There might be pending maintenance costs, which seller couldn’t afford to pay. The outstanding taxes should also be considered.
• Legal issues: In case of inherited property the seller might be having title issues.
• Financial issues which might occur due to nonpayment of upkeep and recurring expenses like electricity bills etc.
• Fixing plumbing, electrical, and structural issues with the house; buyer should get a home inspection done before finalizing the deal.
• The buyer has to deal with the seller and the lender of mortgage (Bank). The entire process is time-consuming and you need both parties to agree to your price. The foreclosure process is also long and would take six to seven months as the bank is also involved.
• The buyer should consider all above before making a short sale purchase even though it might look good up front.

1. Seller: The short selling look like an easy option to the seller a she can get rid of the loan and start afresh. The disadvantages are as follows:

• A negative credit rating will impact the buying capacity
• Banks won’t lend you finances easily due to a negative history
• The approval process to short sell will be long and tedious
• The lender may pursue and file a deficiency.
• The lender should release you from all liabilities by issuing a no due certificate.

1. Lender: The lending institution mostly a bank may agree to short sell to recover the debts partially. The lender may not recover the entire amount in short selling hence loosing in term of finances. In case of buying a short selling property, you might not get a mortgage from your bank that might not be willing to cover your property value as the bank sees a risk in buying the property.
2. Real Estate agent: The real estate agent who facilitates the sale normally for a percentage of sales but in a short sale, the real estate agent won’t get his commission from the bank who is already falling short of the debt owed. The seller is already in debts and might not pay you. In short selling, the real estate agent either recovers his share from the bank if the bank has appointed him or the buyer, in case of the buyer has appointed him to validate the sale.

To sum it up a short sale property is a long and tedious buying of property which might entail a lot of risks especially for the buyer, the seller benefits from sale by paying his outstanding, real estate agent generally have a win-win situation as they ensure they get paid for services by discussing and finalizing their terms before the deal is made. The lending institution (Banks) secure themselves from all sides, the buyer might be the person at maximum risk and disadvantage.

Reference:

Short sales pros and cons for sellers