The reason that a bank will allow a short sale to take place is because the homeowners can show a financial hardship. These hardships occur for a variety of reasons; divorce, loss of job, income reduction, illness, increased cost of living expenses or relocation are examples of typical hardships.
This will be proven by providing a letter of hardship, pay stubs, bank statements, tax returns and a financial worksheet (typically a form required by the lender).
When selling a home as a short sale, it is likely that there will be a negative impact to the credit score of the borrower. The majority of the credit score reduction comes from the late payments that are typical of a homeowner in distress. Sometimes homeowners do not fall behind in their payments, so there is less of an affect to the score, but it will still report as "debt settled for less then what is owed".
There may also be some income tax implications. This will need to be discussed with an accountant.
While it sounds like there are negatives associated with this, there are also many positives. First and foremost, foreclosure is avoided! After two years of responsible credit practices, there is a good possibility that home ownership will be possible again. A homeowner can sell their home with little or no out of pocket expenses. It is an opportunity to start fresh and get out of a negative and stressful situation. There are very few negatives for a homeowner that chooses to do a short sale
A buyer interested in buying a short sale needs to be in a position that they can wait for the property to close without a definite end date in mind. While the short sale process has evolved into a much simpler process than a couple years ago, there is still a bit of an unknown when it comes to timeline. Typically a buyer will see these properties sell for about 5-10% below market value, which is usually worth the wait. However, sometimes the properties are in need of repair, so that will need to be taken into consideration.
The risk to a buyer when purchasing a short sale is that the home will be sold "as is" and there is no guarantee that the home will close. So a buyer may incur the expense of having an inspection and not be able to purchase the home. In New Jersey, the buyer is also responsible for obtaining the CCO on the property, so there may be some out of pocket costs associated with this.
In the end, the buyer of a successful short sale typically end up very happy because they will feel as though they got a great deal, even if the process was a bit tedious.
In the end, the most important thing to consider is the Realtor and attorney that you work with during this process. A Realtor that is knowledgeable and/or Certified (CDPE) will drastically increase the chances of the transaction making it all the way to closing table. So be sure to ask your Realtor and attorney about their short sale training and experience. A short sale is a WIN-WIN for all parties involved!
~ The Coach, The Pilot, and The Shopper