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Understanding Short Sales in South Africa

by | Apr 17, 2023

Understanding Short Sales in South Africa

Understanding Short Sales in South Africa: Process, Alternatives, and Common Mistakes to Avoid

Short Sale Guide

Understanding Short Sales in South Africa

What is a Short Sale?

In the realm of real estate, a short sale refers to the sale of a property at a price lower than the outstanding mortgage balance. Typically, short sales are an indication of a homeowner facing financial difficulties and needing to sell the property before the lender reclaims it through foreclosure.

All proceeds from a short sale go to the lender, who then has two options: either forgive the remaining balance or pursue a deficiency judgment, which requires the former homeowner to pay all or part of the difference. In some regions, the difference in price must be forgiven.

Key Takeaways

  • Short sales often signal a homeowner in financial distress, a sluggish real estate market, or both.
  • The mortgage lender must approve the short sale in advance.
  • The former owner may be required to pay the shortfall, or the debt may be forgiven.
  • The financial consequences of a short sale may be less severe than a foreclosure for both the seller and the lender.
  • For homebuyers, a short sale can be a good opportunity if approached with caution. These sales are more likely to occur during periods of market decline, such as the 2007-2009 financial crisis, which led to a drop in home prices and sales in many areas.

For instance, if property values decrease, a homeowner may end up selling a house for ZAR 1,500,000 while still having ZAR 1,750,000 remaining on the mortgage. The ZAR 250,000 difference (less any closing and other selling costs) is called the deficiency.

Short Sales

Lender Sign-Off

Before initiating the process, the mortgage lender, typically a bank, must approve the decision to carry out a short sale, sometimes referred to as a pre-foreclosure sale.

The lender requires the mortgage holder to submit documentation explaining why a short sale is the best option. No short sale can occur without the lender’s prior approval.

Short sales are often time-consuming and paperwork-heavy transactions, taking up to a year to complete. However, they are not as damaging to a homeowner’s credit rating as a foreclosure.

Essential Factors to Consider for Short Sales in South Africa: Process, Alternatives, and Comparison to Foreclosures

Special Considerations

A short sale impacts a person’s credit score less negatively than a foreclosure, but it remains a detrimental credit mark. Any property sale denoted by a credit company as “not paid as agreed” adversely affects the credit score. Short sales, foreclosures, and deeds-in-lieu of foreclosure all hurt an individual’s credit rating to varying extents.

Short sales don’t always eliminate the remaining mortgage debt. A mortgage has two components. The first is the lien against the property used to secure the loan, which protects the lender if a borrower cannot repay it. The lien grants the lending institution the right to sell the property for repayment, and this part of the mortgage is waived in a short sale.

The second component is the promise to repay. Lenders can still enforce this portion either through a new note or the collection of the deficiency. In any case, the lender must approve the short sale, which means borrowers are sometimes at their mercy.

To convince a lender to agree to a short sale, the homeowner must cite a new source of financial difficulty, not something withheld during the mortgage approval.

Short Sales in South Africa

Short Sale vs. Foreclosure

A short sale or foreclosure are two potential outcomes for homeowners who are behind on their mortgage payments, own an underwater home, or both. In either case, the owner must relinquish the home, but the timeline and consequences differ.

How a Foreclosure Works

In a foreclosure, the lender seizes the home after the borrower fails to make payments. Unlike a short sale, a foreclosure is initiated by the lender alone and is considered their last resort.

In such cases, the lender repossesses the home, hoping to eventually recoup its investment in the mortgage. Many foreclosures occur after the homeowner abandons the property. If the occupants are still in the home, they are evicted by the lender.

Once the lender has access to the home, it orders an appraisal and puts it up for sale.

Foreclosures generally take less time to complete because the lender wants to liquidate the asset quickly. Foreclosed homes may even be auctioned off at a public trustee sale.

Depending on the circumstances, homeowners who experience foreclosure have to wait for two to seven years to purchase another home. A foreclosure remains on a person’s credit report for seven years.

Stop my repossession

How a Short Sale Works

A distressed homeowner typically stays in the home during the short sale process.

A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately.

While a foreclosure essentially allows you to walk away from your home—with severe consequences for your financial future, such as having to declare bankruptcy and damaging your credit—completing a short sale is labor-intensive. However, the extra effort involved in a short sale may be worthwhile.

Less drastic alternatives to a short sale include loan modification or the use of private mortgage insurance.

Exploring Short Sale Alternatives in South Africa and How Real Estate Assist Can Help

Short Sale Alternatives

Before resorting to a short sale, discuss with your lender the possibility of a revised payment plan or loan modification. One of these options might enable you to remain in your home and regain your financial footing.

Obtaining a loan modification may temporarily lower your credit score, as will any application for new credit.

Another possible option for staying in your home could be available if you have private mortgage insurance (PMI). Many homeowners who bought homes with less than a 20% down payment were required to purchase PMI for their properties. If the PMI company believes you have a chance to recover from your current financial situation, it may advance funds to your lender to bring your payments up to date. Eventually, you’ll have to repay the advance.

Real Estate Assist

The Short Sale Process

Several steps are necessary to successfully complete a short sale.

Convince the Lender

Before initiating the process, struggling homeowners should consider the likelihood of the lender agreeing to work with them on a short sale. The lender is not obligated to cooperate.

The source of the financial trouble should be new, such as a health problem, job loss, or divorce, rather than something undisclosed when the homebuyer initially applied for the loan. The lender won’t be sympathetic to a dishonest borrower.

However, if you feel you were a victim of predatory lending practices, you may be able to persuade the lender to agree to a short sale even if you haven’t experienced any significant financial catastrophes since purchasing the home.

To strengthen your position, cease purchasing non-essentials. You don’t want to appear irresponsible to the lender when they review your proposal.

Be aware of other circumstances that may prevent short sale approval. If you are not in default on your mortgage payments yet, the lender probably won’t be willing to work with you. If the lender believes it can recover more money from foreclosing on your home than from permitting a short sale, it may not allow one. If someone cosigned the mortgage, the lender may hold that person responsible for payment rather than agreeing to a short sale.

If you think your situation is suitable for a short sale, speak with a decision-maker at the bank about the possibility. Don’t just talk to a customer service representative—ask to speak with the lender’s loss mitigation department immediately.

If you don’t like what the first decision-maker says, try speaking with another one on a different day and see if you get a different response. If the lender is willing to consider a short sale, you’re ready to move forward with creating the short-sale proposal and finding a buyer.

Consult Professionals

At this stage, you should consult an attorney, a tax professional, and a real estate agent. While these professional services can be costly, attempting to handle a complex short-sale transaction on your own could result in even bigger financial problems.

You may be able to cover these service fees from the sale proceeds of your home. Professionals experienced in dealing with short-sale transactions will be able to provide guidance on payment methods.

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How Real Estate Assist Can Help

Real Estate Assist offers a comprehensive solution for homeowners in South Africa facing financial distress. By providing sustainable and bankable solutions that protect homeowners from being taken advantage of and ensuring a win-win for all participants, Real Estate Assist offers an alternative to short sales or foreclosures.

Real Estate Assist can facilitate the process for you to keep your home or real estate while recovering, unlock equity from your property to address financial needs, and assist you in maximizing your proceeds from the sale of your home or real estate.

By working with Real Estate Assist, you can receive guidance and support throughout the process, ensuring a smooth and stress-free experience. Real Estate Assist can help you make the best decision

Setting a Price, Finding a Buyer, and How Real Estate Assist Can Help in South Africa

Determine a Price

When determining an asking price, ensure you factor in the cost of selling the property to the total amount you need to get out of the sale. Ideally, you want to sell the home for as close to your mortgage value as possible, but in a down market, there is likely to be a shortfall.

In some regions, even after a short sale, the bank may expect you to pay back all or part of that shortfall.

Gather Your Documents and Find a Buyer

Assemble all the documents necessary to prove your financial hardship to the lender. These may include bank statements, medical bills, pay stubs, a termination notice from your former job, or a divorce decree.

It is your responsibility to create a proposal. Keep in mind that the lender must ultimately approve a short sale after receiving all the details, as the lender is the recipient of the proceeds.

Your task is to find a buyer for your home.

Submit Your Proposal to the Bank

Once you have a buyer and the required paperwork, you are ready to submit the buyer’s offer and your proposal to the bank.

Along with the documentation of your distressed financial status, your proposal should include a hardship letter explaining the circumstances that prevent you from making your mortgage payments. You want to make it as convincing as possible while protecting your interests and appealing to the bank.

Exercise caution when submitting your financial information to a lender. If it does not approve the short sale, it may use your financial information to attempt to recover money from you in foreclosure proceedings. If you still have cash assets, you may be expected to use them to continue making mortgage payments or to make up the shortfall between the sale price and the mortgage amount.

An attorney experienced in completing short sales can help you navigate the details.

Short sales may take longer than regular home sales due to the need for lender approval and often fall through. The buyer may find another property while waiting for a response from you. Be prepared for this possibility. If the short-sale transaction goes through, consult with the South African Revenue Service (SARS) to see if you will have to pay taxes on the shortfall.

Remember that a short sale can still impact your credit score. The months of missed mortgage payments before the short sale can appear as delinquent payments on your credit report. It is up to the bank to decide what to report, so it’s in your best interest to try to convince the bank not to report your defaulted payments.

Your bank may be more likely to be generous in this regard if you brought up your hardship before falling significantly behind.

How Real Estate Assist Can Help

Real Estate Assist offers support to homeowners in South Africa facing financial distress. By providing tailored solutions that protect homeowners and ensure a win-win outcome for all parties involved, Real Estate Assist presents an alternative to short sales or foreclosures.

Real Estate Assist can facilitate the process for you to keep your home or real estate while recovering, unlock equity from your property to address financial needs, and assist you in maximizing your proceeds from the sale of your home or real estate.

By working with Real Estate Assist, you can receive guidance and support throughout the process, ensuring a smooth and stress-free experience. Real Estate Assist can help you make the best decision for your unique situation.

Navigating the Waiting Game of Short Sales and How Real Estate Assist Can Help in South Africa

Be Prepared for a Lengthy Process

Short sales are complex and time-consuming transactions for both buyers and sellers. It can take weeks or even months for a lender to approve a short sale, and many buyers who submit an offer end up withdrawing because the process takes too long.

Rules for short-sale transactions may vary, but the steps typically include:

  1. Short sale package: The borrower needs to prove financial hardship by submitting a financial package to their lender. This package includes financial statements, a letter describing the seller’s hardship(s), and financial records such as tax returns, W-2s, payslips, and bank statements.
  2. Short sale offer: Once a seller accepts an offer from a potential buyer, the listing agent sends the lender the listing agreement, an executed purchase offer, the buyer’s pre-approval letter, a copy of the earnest money cheque, and the seller’s short-sale package. If the package is incomplete due to a missing document or a filing error on the bank’s part, the process will be delayed.
  3. Bank processing: The bank’s review of the offer can take several weeks or even months. In the end, it will either approve or deny the offer. Just because the seller accepts an offer doesn’t mean the bank will agree to the price. If the bank believes it can make more money through foreclosure proceedings, it may reject the offer.

Advantages and Disadvantages of a Short Sale

Short sales enable a homeowner to offload a property that is losing value. Although they don’t recover the cost of their mortgage, a short sale allows a buyer to avoid foreclosure, which can be more damaging to their credit score. In some cases, the lender may write off the remaining debt as a loss, thereby reducing the owner’s debt burden.

A short sale also enables the homeowner to reduce the fees they pay when selling the home. In most cases, these fees are the responsibility of the property owner when they sell the property. In a short sale, these fees are paid by the lender.

For buyers, the benefits of a short sale are clear: they get a discounted price on a home from a lender motivated to sell the property. However, the buyer must do more homework as short sales typically don’t come with the same disclosures as a regular sale, and it’s up to the prospective buyer to identify any issues with a property.

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Pros and Cons of a Short Sale

Pros:

  • Allows homeowners to dispose of a debt they are unlikely to repay.
  • Homeowners pay fewer fees than in a typical home sale.
  • Short sales enable buyers to purchase property at a discount.
  • Lenders may write off part of the debt as a loss.

Cons:

  • Short sales come with fewer legal disclosures than a typical home sale.
  • More paperwork is involved in a short sale.
  • Short sales can damage the seller’s credit rating, though less than a foreclosure.

Avoid Common Pitfalls

Homes involved in a short sale are typically sold as-is, without the standard seller obligations of a typical real estate transaction. Since short sales do not come with the usual disclosures of a regular house sale, it’s the prospective buyer’s responsibility to inspect the property and identify any issues. Short-sale homes might be in worse conditions than average properties on the market, making it crucial to detect any problems.

Additionally, potential buyers may not allow themselves enough time before closing. As previously mentioned, short sales tend to require more effort than an average house sale, which means they might also take longer to close. Buyers should ensure they have enough time to complete the process before the sale closes.

Frequently Asked Questions

What Is a Short Sale?

In real estate, a short sale occurs when an owner sells a house at a price lower than the outstanding mortgage amount.

This usually happens when the owner faces financial difficulties and is behind on mortgage payments. The owner is obliged to sell the home to a third party, with all the proceeds from the sale going to the lender.

The lender must approve the short sale before it takes place. The process can take as long as a year due to the paperwork involved.

What Is the Difference Between a Short Sale and a Foreclosure?

In a short sale, the process is initiated by the homeowner to resolve financial troubles. The owner must prove the extent of their financial distress through documents submitted to the lender. If the lender agrees to proceed, the homeowner is responsible for finding a buyer.

In a foreclosure, the lender initiates the process by seizing the home and, if necessary, evicting the owner who has failed to make payments. The foreclosure process is generally faster than a short sale, as the lender seeks to liquidate the asset as quickly as possible.

How Real Estate Assist Can Help

Real Estate Assist (www.realestateassist.co.za) offers support to homeowners in South Africa facing financial distress. By providing tailored solutions that protect homeowners and ensure a win-win outcome for all parties involved, Real Estate Assist presents an alternative to short sales or foreclosures.

Real Estate Assist can facilitate the process for you to keep your home or real estate while recovering, unlock equity from your property to address financial needs, and assist you in maximizing your proceeds from the sale of your home or real estate.

By working with Real Estate Assist, you can receive guidance and support throughout the process, ensuring a smooth and stress-free experience. Real Estate Assist can help you make the best decision for your unique situation.

Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered legal or property advice. We do not take responsibility for any actions taken based on the information provided in this blog. It is always recommended to seek professional advice for your specific legal or property needs. Contact us (Real Estate Assist) if you seek such advice and we will appoint a professional from our team to be of assistance.

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Please Note: We are unable to provide assistance if you do not own a property. Real Estate Assist specializes in helping property owners who are experiencing challenges with their mortgage payments. If you own a property and require support with debt consolidation without going through the debt review process, our team is here to help you explore options to unlock the equity in your home for necessary family matters.

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