Explaining a "Short Sale"

With so much information in the media about foreclosures, I thought I would take the time to offer some helpful information on the subject.

From the Illinois Association of Realtors, the IAR Legal Hotline:

What is a short sale?

A short sale is a situation in which the real estate seller owes more money on the loan(s) secured by the real estate than the sale of the property will likely produce on the market. The seller is in a distressed situation, but the bank/lender has not yet taken title from the seller through the foreclosure process. At this point, there might be a window of opportunity for the seller to put the real estate on the market and try to sell it in order to at least partially satisfy the lender who holds the mortgage.

Who is the right buyer for a short sale transaction?

The right buyer in a short sale transaction must be patient and have money ready to proceed once the seller’s lender does review the transaction. Many times, obtaining lender approval will take quite a bit of time. A recent article indicated that the average time for a lender response on a short sale contract was 4.5 weeks. So your buyer should not be in a hurry, not need to move into a home right away and not be making offers on other properties without the advice of legal counsel. In addition, the buyer should be well qualified financially or have their financing arranged. Think about this. If your buyer’s contract shows that your buyer is ready to close at any time with no issues on buyer’s loan, this will likely make your contract “package” more attractive to seller’s lender than another contract where buyer’s financing may be in doubt.

Is Illinois a “judicial foreclosure state” or “non-judicial foreclosure state,” and what is the time frame for the process?

(Note: We recognize this question deals with the foreclosure process as opposed to the “short sale” situation which is typically pre-foreclosure, but we still thought this relevant and worthy of mention in this area).

Illinois is a “judicial foreclosure state” which means if there is real property that is subject to a mortgage security interest held by a lender, the lender must seek a sale of that security through the courts in the form of the judicial foreclosure proceeding.

Authors and attorneys Steven B. Bashaw and Patricia M. Nelson offer a very good summary of the timetable for a “typical, uncontested default case…as follows:

1) pre-complaint proceedings, during which the borrower misses payments and may be trying to work things out with the lender; 2) the filing of the complaint; 3) jurisdiction, that is, when the borrower is served or notice is published; 4) summary or default judgment in the lender’s favor; 5) the expiration of the borrower’s redemption period, which is the later of seven months from the date of service or three months from the date of judgment; 6) sale; 7) confirmation of sale, with the order of possession stayed for thirty days; 8) possession, meaning the eviction of the borrower; and 9) a petition on the part of the lender for any deficiency, or, rarely, on the borrower’s part for any surplus.

The authors suggest that the timetable in an uncontested judicial foreclosure in Illinois will take at least one year.

[This excerpt was taken from an article written by Helen W. Gunnarsson for the February 2008 Illinois Bar Journal, p. 78, citing “Basic Foreclosure Issues: Mortgage Foreclosure Defense for the Legal Aid and Pro Bono Attorney,” by Patricia M. Nelson and Steven B. Bashaw, published by Chicago Volunteer Legal Services [CVLS]].

Buying a home that is in pre-foreclosure or foreclosure, can be done with the right parties involved that are knowledgeable about foreclosure sales. The biggest deterrent is the amount of time it may take to purchase a "short sale" or foreclosure home.

Jim Starwalt

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Jim Starwalt, Broker Associate RE/MAX Center, Phone: 847-548-2625 Jim@StarHomeFinders.com