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The skinny on short sales
Yes, there are still plenty of foreclosures out there awaiting new owners. But something else in the field of distressed property sales has caught fire: short sales.So what are they?
A short sale is when a home is sold for less than what is still owed the lender, who agrees to forgive the difference. This is not a new concept. But the practice has spiked recently as home values have dramatically declined.
How many are there?
Over the past five months, according to National Association of Realtors spokesman Walter Molony, the sales of distressed properties – foreclosures and short sales – accounted for roughly 45 percent of all home sales in Virginia: 37 percent for foreclosures and 8 percent for short sales.
“We treat them together,” he said, “because they have the same impact on the market -- being sold at roughly 20 percent below the median [price] for traditional homes in good condition.”
In Loudoun, Realtor and author of the www.LoudounScene.com real estate blog Danilo Bogdanovic said about 60 percent of the sales he's now seeing involve distressed properties, with nearly a third of those being short sales.
“This is the most I have ever seen,” he said, giving examples of homes in some of Loudoun's pricier communities going for up to $600,000 less than what was originally paid for them.
How does it work?
First, the owner must submit to the lender documentation of his or her financial situation, including a hardship letter detailing the circumstances that led to the need for a short sale, such as loss of a job.
Once an offer is made on the house, it is reviewed by the lender. The lender does not have to accept the offer, and can make its own counter. About 25 percent of short sale requests are ultimately approved, and reach the closing table. The process can take up to six months, Bogdanovic said
“If you have a deadline to move in two months, then forget it,” he said. “A short sale is not for everyone.”
What's the downside?
The biggest downside, according Don Griffin, manager of public education for Experian, a large credit rating company, is the substantial blemish such a sale leaves on a seller's credit report.
He said the number of points a short sale can cost a seller varies depending on the individual. Nonetheless, he said, “It's going to be a fairly significant effect.”
Some reports put the credit hit as high as 100 points.
Whatever the number, Griffin said, the damage will not be as severe as what's caused by a lender repossessing a home.
“It's a matter of very bad versus very, very bad,” he said, adding that the damage remains on credit reports for seven years. “It is going to have a negative effect.”
Contact the reporter at jjacks@timespapers.com
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