Most everyone has heard about short sales, but not everyone knows much about them. Let me try to explain exactly what a short sale is.

What is a Short Sale

Around 2005 the real estate market was hot and near it’s peak. Home prices were steadily rising and everyone thought it was a great investment. People would buy a home and sell it a year later for a huge profit. Then they would buy another, more expensive home looking to repeat the process. And the banks were very cooperative. If you had a decent credit score and could prove you were alive, you could get a mortgage.

Many of these mortgages were 5 or 10 year ARMs. This was an adjustable rate mortgage where the initial length was either 5 or 10 years at a low rate, then it would change to a higher rate. Also popular was the interest only mortgage, where the interest rate was exceptionally low, and you made no payments towards the principle. In addition, the interest you didn’t pay was added to the principle. When the 5 or 10 year period ended, you would owe a lot more than you borrowed. But people didn’t care, the home value would rise and they could sell for a profit or refinance.

But the values didn’t rise, they fell big time.

People couldn’t refinance because the home wasn’t worth the mortgage value. They couldn’t sell because the market value was below what they owed. But the bank wanted it’s money, and if you couldn’t pay, they would foreclose.

Now, the banks didn’t want to foreclose. Their expenses to foreclose were high, and they would lose a lot by taking ownership of a property and reselling. So they decided they would cut their losses with short sales.

What is a Short Sale

With a short sale the borrowers ask the bank to accept less than what the bank is owed in order to sell and get out from under the problem. Quite often the banks accept less than they’re owed. And that’s because their alternative is to foreclose, on the property,  And that will create an even bigger loss for the bank.

This is a time consuming process. The homes often don’t get maintained properly because the owners don’t have the money to do so. And frankly, they know they’re losing the home, so why should they bother.

Bottom Line

Thankfully there are not as many short sales as there were 5 years ago. And that’s because the real estate market has corrected itself for the most part. If you’re looking to buy a home that’s a short sale, there usually aren’t many available. And if you do find one, it won’t close quickly.

If you’re ready to buy a home, a short sale really isn’t a bargain, unless you’re looking for a handyman special. Either way, call us – Bunny and Art Reiman – Realtors. We can help you through the process.

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