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What are short sales?

Many homeowners in some formerly hot real estate markets owe more than what the house is worth. This may occur because a buyer paid too much or because a property was refinanced to take advantage of rising home equity values. Now that properties have declined in value or because of too much debt, some home sellers are resorting to short sales. In essence, the bank is willing to take less for the property than the loan balance due. Assume that a seller owes $200,000 on a loan and finds a buyer willing to pay $175,000. If the seller agrees to accept this discounted amount, the bank must agree, too. If agreement is reached, the bank receives all proceeds (less commission and negotiated  expenses) and is taking less than what is owed to remove the property from the banks inventory of poor performing loans. Notice the homeowner is houseless and penniless. A short sale and a foreclosure both impact a credit rating negatively. It is estimated that either of these options negatively impact a credit rating by reducing the seller’s credit score by approximately 300 points. A leading expert stated that neither option is good; it is comparable to choosing whether to be run over by a truck or a bus. Either way the seller is dead. There is one important difference, with a short sale, Fannie Mae will allow a borrower to potentially qualify for a new Fannie Mae loan after two years. With a foreclosure, they will make the borrower wait a minimum of five years before being eligible for a Fannie Mae loan.


Fortunately, the Albany market has not been overpriced nor has it experienced a significant decline in values. Short sales are in the news but primarily in formerly high flying real estate markets such as Sacramento, California where 20 percent of the homes for sale recently were properties that were listed as short sales.

Written on 2009-08-04

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