Each borrower that’s fronting the eventual foreclosure of their property is in a bad position. Losing their real estate property, damaged reputation, litigation expenses, and harm to their capability to ever borrow funds in the years to come are all negative consequences that come along with foreclosures for borrowers.
The lender is not in a great situation too. The danger that a foreclosure deal won’t produce sufficient income to make it whole, the possibility that the borrower has fled or is intentionally destroying the property, the costs of the potential litigation, and the responsibilities the bank may receive if they have to take title to the property are all possible scenarios on the lender’s end.
However, there’s one alternative that can effectively eradicate most of these matters—a short sale. This informative article dives deeper into the essential components of a real estate short sale, its benefits, weaknesses, and describes the short sale process for both parties. So, without further ado, here are the top advantages and disadvantages of the short sale process.
What Is A Real Estate Short Sale?
Essentially, a short sale is a term used to describe the process of a real estate owner selling their property for less than what they owe on the outstanding mortgage. When it becomes evident that the borrower won’t be able to maintain their mortgage obligations, the lender may allow them to conduct a short sale.
As a result of the short sale, the lender may have the opportunity to recover any potential losses resulting from delinquency. In addition, the borrower can avoid foreclosure and any other blemishes on their credit report. And while a short sale isn’t the perfect scenario for either the homeowner or the bank, it’s unambiguously better than the alternatives for everyone involved.
Advantages Of A Short Sale
Borrowers should prefer the event of a short sale and do everything within their power to dodge foreclosure because of the following reasons:
- First of all, foreclosures are pretty costly to defend because of court costs and lawyer fees.
- Secondly, the short sale could have a similar influence on their credit rating as a foreclosure but might let the borrower find backing for a new land much faster than if a foreclosure was on their previous record.
- The bottom line is that each real estate short sale is a private agreement and business between the borrower and the lender. On the other hand, a foreclosure is a public event. Public means that the borrower might experience embarrassment and need to undergo an “attack” of lowball credit repair and foreclosure offers from enterprises that observe public records.
Lenders should also favor a short sale instead of a foreclosure because:
- Foreclosures are also pretty expensive to arrange and win for the lenders.
- The short sale process dramatically reduces the chances that the borrower will intentionally harm the property.
- During a foreclosure, the borrower quits making all payments, including those for insurance. The lender must cover the insurance expense until the foreclosure is finished to avoid uninsured damage to its collateral.
Disadvantages Of A Short Sale
Some of the most significant disadvantages of short sales for borrowers include:
- The borrower can efficiently navigate all process hurdles, find a buyer, get permission from all lien holders, and still have the prospective purchaser of the property back out at the last minute.
- Also, the bank might never consent to the short sale in the first place, or worse, they might not respond in time and drag out the process for months, even years.
- Even though a short sale is more beneficial than a foreclosure, a short sale can drop its luster if the process has to be repeated more than once.
- All real estate short sales demand that all lien holders consent, and if there are too many, the short sale might be next to impossible.
Lenders might not love the idea of having a short sale because:
- Lenders can get less money than they’re owed or might not be paid at all if different potential purchasers back out, and the process has to be repeated.
- Short sales are time-consuming and costly for both sides, but these negative aspects exist with a foreclosure. For that reason, the lender does the math, and if the short sale proves to be more costly than the foreclosure, the bank might opt for the second option.
While getting a short sale approved and closed is not a straightforward task, it may be the best solution for both parties. If you have to choose between a short sale or foreclosure, a short sale is often the lesser of two evils if the deal can get through.