What is a short sale?

What Is a Short Sale?



A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed (short) on the debt, a sale of the property can be accomplished.



A short sale can get a homeowner out from under a high-debt home. These sales can offer good deals to home buyers and sellers alike. Home buyers looking for a good deal on a property purchase can get a price break on a short sale - if they understand the short-sale process completely. A short sale is a lengthy process, taking longer than normal transactions.



A short sale has two intrinsic and inseverable components. A Short Sale is successful when (1) a lienholder(s) (a.k.a. Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arm's length sale at or below the Appraised Value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property's Appraised Value. A short sale may occur when the lienholder expects that a mortgage will likely never be repaid and the home's value (due to the home's condition, such as if a prior homeowner vacated the property and left it damaged or trashed, or general economic conditions in the area or nationwide) will not (either quickly or at all) regain equity to allow full payment of the mortgage.



Short sales are becoming increasingly rare as the economy improves. They were much more prevalent during the Great Recession, when many U.S. homeowners were "underwater" on their home loans; i.e., they owed more on their homes than the homes were worth in value.


How a Short Sale Works



In a real world, short-sale scenario, a home seller puts his or her property on the market, while formally designating the home for-sale as a potential "short sale/subject lender" deal to any potential buyers.



Once a buyer agrees to make a short sale offer, the homeowner contacts his or her bank, and completes an application asking for short sale status on the home. There is no guarantee the bank will green light the application, but a short sale does eliminate many hassles associated with the mortgage loan, such as closing the books on the homeowner loan, and the bank or lender gets a portion of their loan repaid.



Home sellers involved in a short sales can expect to file several firms and documents to their mortgage lender. Those include a hardship letter stating why you can't fully repay your mortgage loan, along with the filing of records like pay stubs and tax returns that back your case as being unable to repay the home loan.



The bank will then review your application, send out an appraiser to estimate the full value of the property against the short sale offer, and then either approve or reject the short sale request.


Benefits of a Short Sale to a Home Seller



If the property seller is presented with a short sale opportunity, it's a good idea to thoroughly vet all the options on the table, and calculate the risks and opportunities and look at other relative personal financial options, before making a decision.



Nobody is saying a short sale is a perfect solution to a home seller who has suffered a financial setback and owns a home with where the mortgage exceeds the property's value - but it might be the best option.



Consider these benefits of a short sale:


1. Credit score advantages



A short sale is highly preferable from a personal credit score point of view, especially when weighed against any potential home foreclosure. Credit scoring firms take a dim view of a foreclosure, and will issue a credit score much lower than when a home seller turns to a short sale instead. That not only protects the seller's score, it keeps them "in the game" and better able to buy another home down the road, without the burden of a significant foreclosure-induced credit score decline.


2. Emotional advantages



In many instances, a home mortgage is the biggest financial event of a person's life - at least before retirement. The seller avoids a "worst case scenario" of foreclosure and can honestly say they sold their home and moved on with their life.


3. Saving on home sale fees



With a traditional home sale, the seller bears the burden of fees and charges, including real estate agent commissions, which can be 3%-to-6% of the total home sale. In a short sale, those fees and commission are paid by the bank.


Negatives of Short Sales to a Home Seller



Short sales can create issues for sellers such as:


1. No cash-out



A short sale means they won't earn any profit from the sale of the house - the bank or mortgage lender gets all the sales proceeds.


2. Dependence on the lender



Home sellers also need a green light from their lender on a short sale - they can't make that decision on their own.


3. Less cash for a future home purchase



Since the seller earns no profit on a home short sale, they won't be able to steer home sale assets toward the purchase of a new home. Instead, they'll be starting from scratch.


Benefits of a Short Sale to a Home Buyer



Home buyers can take good advantage of a short sale, as well, with several advantages:


1. Reduced price



Primarily, the big benefit is the increased odds of getting the home for a reduced price, knowing that the house is in short sale mode, and that the owners, and likely even the bank or lender in many cases, will want to sell the home and get out from under the home loan. As any real estate agent will say, a motivated seller is a seller who wants to cut a deal, so a low-ball offer has a better chance of being accepted in a short sale than in a traditional home sale negotiation.


2. Less competition



Many home buyers, especially first-time buyers not used to the complexities of the process, may not want to get involved with a short sale. That opens up the field for home buyers with more patience for a short sale, and who'll face less competition for the home.


Negatives of Short Sales to a Home Buyer



Short sales can have negative repercussions for buyers such as:


1. A longer home-purchase timetable



For buyers, the paperwork process is significantly longer in a short sale (usually up to 120 days) than in a traditional home sale (usually up to 45 days) and that may be a deal-breaker for home buyers.


2. Lender interference



Lenders may also get directly involved in the home price negotiations, often asking for a higher sales price than the home seller (including the insistence that the buyer make all or most of the closing fees), in order to recoup more money on the home loan.


3. The property may be in disrepair



It's also highly advisable for a short sale buyer to work with a real estate agent well-experienced in the short sale process. It's also strongly advised that a short sale buyer hire a home inspection professional to thoroughly examine the property, as short sellers may not have the financial resources to keep up with home maintenance and repairs.