What is a 'Short Sale?'

Buyers often ask me if I have access to short sale listings, yet few understand exactly what a short sale is. A short sale, in real estate terms, is simply when the seller’s proceeds from the sale are insufficient to pay off loan on the property.

Here’s a real life example. At the height of the real estate boom, John and Mary bought a home for $300,000 and took out a mortgage for $275,000. In the past few months, John has lost his job and Mary is facing medical issues. Due to their financial situation, John and Mary have been unable to make their mortgage payments and are now facing foreclosure. In an attempt to get out of their situation, they’ve decided to sell the house. Unfortunately, the house they paid $300,000 for 5 years ago is now worth $250,000.

After closing costs, there will not be enough money to pay off the mortgage.
John and Mary have two choices: they could bring money to closing to cover the short fall (but if they had that money, they probably wouldn’t be in this situation to begin with) or they could negotiate with the lender to accept less than what is owed to satisfy the loan (sell the house short).

Whether or not a lender will accept a short sale will depend on several factors. The owner’s financial situation, attempts at other remedies (loan modifications for example), how much they are proposing to sell the house for in comparison to the appraised value, and the differential between the proposed payoff amount and the actual payoff amount are all considered. Recently, the government introduced incentives to get lenders to approve more short sales which have helped the process somewhat. However, depending on the particular lender (and I won’t name names here), the process can be dragged out for months and there are a lot of hoops to jump through.

So are short sales a “good deal” for buyers? Well, they can be.

Lender’s have guidelines that establish how much of a loss they are will to take with short sales and they will only accept the loss if it makes financial sense for them to do so. A buyer must consider the probable appraised value of the house, the seller’s payoff amount, how far along the house is in the foreclosure process amongst other things when constructing an offer that’s a good deal for them and at the same time has a high likely hood of getting approved by the lender.

The approval process itself is also a consideration of the buyer. I’ve had short sale deals that have gotten approved in a matter of days and others that have taken months. A person going into a short sale transaction should be aware that it’s likely they will be waiting for quite some time waiting for a “yes or no” from the seller’s lender. Some buyers might want to exclude short sale listings from their search all together if they are on a timeline and need to be in their new home by a certain date.

As the real estate market correction continues to unfold, it’s likely that more and more home buyers and sellers will be involved in a short sale transaction. It’s important for everyone involved to be educated about the process and understand what it means to them.