In the face of rising foreclosure rates, homeowners are increasingly turning to short sales as a means to preserve their credit. However, navigating the short sale process can be intricate and fraught with potential pitfalls. A well-crafted strategy is essential to avoid costly mistakes and achieve a successful outcome. Here's a detailed guide to executing a short sale, complete with the rationale behind each step and the latest industry insights.
The first step is to list the property on the Multiple Listing Service (MLS). This demonstrates to the lender that efforts are being made to sell the property at market value, which can facilitate negotiations for a favorable settlement.
Investors typically propose lower prices to maximize their returns. Although these initial offers may be below market value, they are crucial in starting the short sale process and establishing a baseline for the lowest price a lender might accept.
Accurate and current financial information is vital. This includes all relevant documents that illustrate the homeowner's inability to maintain mortgage payments, providing a clear picture of their financial hardship to the lender.
A complete short sale packet is submitted to the lender(s), ensuring that no information is lost and expediting the process. Given the backlog of short sales and foreclosures lenders often face, this step is critical for efficiency.
While not common practice, obtaining an independent Broker Price Opinion (BPO) or appraisal can offer a valuable second opinion on the property's value. This can be instrumental when negotiating with junior lien-holders and the primary mortgage lender.
To attract competitive offers, the property's price is systematically reduced each week following the lender's BPO completion. This encourages potential buyers to engage and can help find the best available price.
After the lender's BPO is in, negotiations begin to determine the lowest net price the lender will accept. This takes into account the significant costs associated with foreclosure, which can range from 15-20% of the property's value.
The highest and best offer is weighed against the lender's approved bottom line. If an investor's offer is substantially higher, they may proceed with the purchase and subsequent resale. Otherwise, the highest offer is presented to the lender for approval.
The final step is to close the deal, ensuring that the seller is released from further obligations and that any debt forgiven by the lender is reported correctly for tax purposes.
While this process does not guarantee success, it provides a structured approach that enhances the likelihood of a favorable short sale outcome. It's important to note that in the event of a forgiven debt, the IRS may consider this as taxable income. However, the Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence, subject to certain conditions IRS.
Short sales can be less costly for lenders than foreclosures. According to a study by the Federal Reserve Bank of Philadelphia, lenders can save an average of 15% on foreclosure costs when opting for a short sale Federal Reserve Bank of Philadelphia. Moreover, RealtyTrac reports that short sales sell for an average of 20% below market value, offering opportunities for buyers RealtyTrac.
In conclusion, a strategic approach to short sales can be beneficial for both homeowners and lenders. By understanding the process and employing a methodical strategy, it is possible to navigate the complexities of a short sale and emerge with a successful transaction.
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