What is a Short Sale?

Date: January 17, 2014

In the past few years, the term “short sale” has become common language in many real estate markets. So, what is a short sale? By definition, a short sale is the sale of a home for less than the owner owes the mortgage company, which can leave the owner responsible for the remainder of the mortgage debt, whether they have the funds to pay for it or not. While obviously not an ideal situation for a seller, a short sale is different (and better) than a foreclosure, which is when the lender assumes the home’s title and sells it directly.

So, what does a short sale mean for sellers and buyers? Here are the facts:

For both buyers and sellers, the short sale process can be a long, taxing ordeal. However, in the end, it is typically well worth the frustration for both parties. The seller is relieved of significant debt and the buyer gets a real bargain on a new home. Even banks are usually happy, because they get a payoff as well.

Why does the short sale process take so much more time than a typical closing? In a short sale, not only do buyers and sellers negotiate, but the seller must get their agreed-upon offer approved by their lending institution, which can sometimes take up to nine or more months.  

What can a seller expect from a short sale?

• Sellers should plan to be involved in the short sale process. Usually, avoiding foreclosure is the seller’s goal, so that they can take out another home loan in the near future. A short sale can leave a negative mark on a seller’s credit, but it usually lasts only a couple of years. In some short sale cases, banks will actually report the debt as “paid in full,” so a seller’s credit takes even less of a hit. In contrast, a foreclosure can negatively affect a person’s credit for up to 10 years.

• Despite the fact that it seems like a win-win for buyers and sellers, if sellers think a short sale sounds like a great way to get out of a debt that they don’t really want to pay, they should think again. Banking institutions require proof that sellers NEED to go through the short sale process. That proof can include being upside down on a mortgage, demonstrating financial hardship and an inability to afford a current payment. Banks may even require a comparative market analysis that shows a person’s home doesn’t have a shot of selling for the amount that they owe.

• If a seller is going through the short sale process but has other outstanding debts, they need to beware of declaring bankruptcy, because doing so can diminish their ability to complete the sale. Bankruptcy rules dictate that creditors are not able to collect any debt, mortgage payments included.

• Just because a short sale goes through may not mean that a seller’s financial troubles are over. In fact, after the sale, it is possible that a bank can still come after the seller for the difference in the loan balance. Often times, sellers can add a clause to their short sale agreement that prevents banks from doing so, but it may be wise to seek the help of an experienced real estate agent or lawyer to go over the fine print.

What can a buyer expect from a short sale?

• Be prepared for defeat. It may sound harsh, but the fact is that far less short sale transactions go to close, simply due to the sale process. At times, it is much easier for a buyer to walk away from a short sale than to forge through the frustration. In the end, a buyer can receive a great deal, but should be aware of what they are getting into ahead of time.

• Although a buyer may not be looking for a fixer upper, a short sale property can end up being just that. Many homeowners, who decide to enter into a short sale agreement, are doing it because of financial reasons; so, upkeep of the property they can no longer afford is, likely, not a top priority. As with any home sale, buyers should be sure to thoroughly investigate a short sale and have a home inspector do the same. If there are many areas in need of repair, it is important to factor those costs into the budget, because short sale homes are usually sold “as is,” i.e. no repairs or price reductions for a home in need of some extra love.

• Because homeowners who decide on a short sale are often struggling to meet their debts, they may have more than one mortgage out on the home a buyer is considering. So, buyers should absolutely deal with all lending institutions or they could see major problems down the road. Title officers can help identify any liens attached to short sale properties.

• Unfortunately, banks are not the only hurdle involved in a short sale transaction. In fact, if a short sale property is being covered by mortgage insurance, then that can also put a damper on closing. In the very typical case of a short sale not covering the total amount owed on a loan, mortgage insurers can hold up the sale, simply by keeping quiet.

• A short sale is a great way to get a lot of bang for a buyer’s buck; but, it is important to remain realistic about the price. Banks are very likely to refuse lowball offers. Remember, even if a seller agrees on a price, banks still want to see most of the money they are owed. But, buyers can protect themselves during a short sale by obtaining an agreement with the seller that their offer will be the only one presented to a lender. With only one offer on the table, a lender may be more likely to move forward. Of course, if a buyer’s offer is turned down completely, that agreement is null and void.

• Finally, if a buyer’s offer on a short sale is accepted, they should be sure that they have been pre-approved from their own lender. Once the cue to close is given, buyers should do everything to complete the deal and enjoy their new home!

Undoubtedly, for both buyers and sellers, the short sale process can be long and arduous. Whatever side of the table you may be on, it is a good idea to have an experienced agent, who has dealt with numerous short sale transactions on your side.

Find an experienced Prudential Preferred Realty agent who is ready to help you with a short sale today.