More Information On Short Sales
There are two main types of short sales in commercial real estate: owner-financed and investor-financed. In commercial real estate, it is generally the case that an owner has put a property on the market that is for sale to a third party. Typically, this will be someone who is a friend or business associate of the owner. The sale will take place even though there may be some funds tied up in the property.
Commercial lenders have various ways in which they handle short sales. They can use either the traditional method of taking the property through foreclosure or the more recent method of taking the property by placing a short sale offer on the property. In commercial real estate, being short in a property means selling it to a third party at a discount that will reflect a loss in the price that the bank is willing to pay for the home. This is distinctly different from a traditional “short” position, in which the buyer will gain equity in the home even if the property continues to be sold at a loss. Investors have gained equity in homes by using a short sale method. These transactions usually go through the judicial system and are subject to a great deal of regulation.
For commercial real estate investors, a short sales negotiation process starts with a note agreement. This is an arrangement in which the bank agrees to accept less than what is owed on the property in exchange for a note. The note is created by executing a promissory note. Investors must understand, however, that even though the bank agrees to accept a loss for the note, it has the right to foreclose in the future if it determines that the amount of the loan was excessive.
When the short sale is consummated, the proceeds from the sale are applied first to the deficiency balance of the loan. Then, any remaining funds are applied to the outstanding balance of the loan. This is usually the last payment made on the mortgage. Commercial real estate investors must be knowledgeable of all of these details when they enter into a short sales negotiation process. There are several important differences that can affect the way the transaction is handled between conventional sales and short sales.
One difference is that a residential short sale will not cause a homeowner to lose their house. In foreclosure, the lending institution may insist that a homeowner go before a judge to determine the reason for their foreclosure. A homeowner can lose their home, even after a short sales process is completed. If a homeowner simply does not attend a foreclosure auction and does not sell the property at a sheriff sale, the bank can place the property into an auction block and sell the property to recoup its losses. Foreclosure auctions are public but not always profitable. If the bank cannot sell a property because the price is too high, it has no recourse to prevent foreclosure and it may force a homeowner to move out before the foreclosure auction occurs.
A different difference is that commercial real estate short sales are done with less scrutiny by lenders and creditors. Lenders have the option of taking over a property from the owner, if there are not enough funds to settle the mortgage. A short sale allows a lender to move forward with negotiations while it waits for adequate funds. This allows both lenders and borrowers to move forward to resolve their problems without the expense and risk of a foreclosure. The credit score of the borrower does not disappear during a short sale process; however, a short sale will be recorded on the homeowner’s credit history if he or she completes the terms and agreement.
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