What is a Short-Sale and How Does it Affect the Value of My Home?

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When a mortgage refinance is in your future, you may need to worry about what the industry calls short-sales and how they can affect the value of your home. A short-sale of real estate means (1) the property owner can not longer afford to make the monthly payments on the mortgage, so (2) the lender is endangering to foreclose the loan. To prevent this (3) the property owner offers to sell the property at whatever the market will bear , and the lender agreements to (4) permit the sale even if it is for a sales price less then the outstanding mortgage balance. Via a short-sale, therefore, both parties (5) eat their corresponding losses so (6) foreclosure is avoided, something both parties really want. Selling a property short is far from a painless process (for the property owner and the lender), but avoiding foreclosure is usually better for both of them.

So when a mortgage refinance (or the sale of your home, for that matter) is in your future, how does this affect you? Please understand that the value of your home is, to a great extent, a function of the recent sales prices of other homes in your neighborhood. If there is one short-sale there, it likely will not make any difference to your house. But, if there are 10 short-sales in your neighborhood, then they likely serve to set the level of the market. So if you live in what once was a $ 250,000 neighborhood, and there recently have been a bunch of short-sales in the area of ​​$ 150,000 in your neighborhood, you now live in a $ 150,000 neighborhood, not a $ 250,000 neighborhood. Since the market sets the value of your home (not the appraiser, not the broker – who just wants a listing, and not your neighbor fishing for an offer north of $ 300,000), your home's value has dropped. In fact, it may have dropped so far that you are now upside-down in your mortgage. In other words, the value of your house may have dropped so far due to the effect of short-sales that you owe more on the mortgage than your house is worth in the current market.

Now, at first blush, this may appear to be a cause for concern, especially if you want to sell your house or refinance your mortgage. (OK, it may even be a cause for panic). But short-sales in a neighborhood are like lancing a boil. You must lance the boil (painful) and get all the nasty stuff out (yucky) before the healing process can begin. Face it: as long as there are homes available at short-sale in your neighborhood, the value of your house will suffer. So, its best for all concerned to get them sold as quickly as possible, despite the pain in that process, so the healing can begin.

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Source by Timothy Andersen