27 Jul Positives & Negatives of Short Sales
This post originally appeared on Lee and Associates Orange Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
By: Marlene Affeld
In the context of a commercial real estate transaction, a short sale is simply a sale of a piece of commercial real estate in which the net proceeds from the sale fall short of the total debts, second mortgages or liens against the property. In this case, all lien holders have agreed to accept less than the total amount remaining owing on the debt so that a liquidation of the asset can be accomplished. A situation in which the lender may agree to a short sale on the property for less than the balance of the mortgage may exist if the owner is unable to service the debt and make the monthly payments, does not have assets or equity to repay the full balance of the loan, and desires to move from the property and avoid bankruptcy and the headaches and frustrations inherent in a foreclosure procedure. In a short sale, the seller’s credit is not as adversely affected as if the property had of gone into foreclosure. Short sales and foreclosures make up about one-half of all commercial real estate transactions.
The lender and any other junior lien holders must approve the transaction before the sale can proceed. A bank will not grant their approval of a short sale until it has been determined that the owner is in not in a position to repay the loan and accepting the short sale is a preferred alternative to foreclosing on the property. Because short sales are quite complicated, it is imperative to work with an experienced Realtor, knowledgeable in short sale procedures. Short sale contracts typically have the buyer purchasing the property in “as is” condition with the buyer paying for all inspections and repairs. As a buyer, you may have to assume some of the closing costs typically handled by the seller at closing.
A Win-Win Transaction
A short sale is advantageous to the buyer who purchases the property at fair market value and forgoes the risks of buying a foreclosed property. Owners pursue a short sale to avoid foreclosure and credit damage, allowing a graceful move to more affordable space. A short sale is a “win-win” situation for everyone as the lender mitigates his losses and recoups a portion of the bad debt and avoids further loss in foreclosing and having to resell the property.
It is important that both buyers and sellers understand key commercial real estate terms when conducting a transaction. Short sales are a profitable transaction for a real estate broker, the listing agent, the buyer’s agent, the closing or title companies, mortgage brokers, inspectors, and appraisers. All will earn from the short sale.
The Pitfalls Of A Short Sale
Many problem issues can arise in a short sale. A seasoned Realtor will be able to uncover possible glitches in the sale and plan for them. When selecting a Realtor as the buyer’s agent, be sure to verify that your choice has a broad background in facilitating the intricacies of a short sale contract and understands the key commercial real estate terms involved in the transaction.
At closing, the seller will likely have to pay some monies or agree to carry an unsecured debt if the sale is to be approved. If the seller is unable to pay or refuses to pay, then the short sale may fall through even though the lender has approved the purchase.
Each short sale is unique and complex, often complicated by the emotionally charged situation of the seller being on the brink of losing their business. The short sale process also typically takes much longer to close than a traditional sale, and it may be difficult to lock in a firm closing date until all of the seller’s mortgage lenders come to terms and agree to the short sale. HELCO lenders and other junior or special assessment liens may also have to be approved before a short sale may move forward. In a situation where the buyer is obligated to a specific timetable, purchasing a property on a short sale may not be the ideal way to go.
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