What is a Short Sale?

Simple Answer

The seller is asking their lender(s) to agree to take less than the amount owed on the home as payment in full. It's considered a short sale when the sale price is insufficient to pay off the total mortgage(s) and costs of the sale. Contrary to its name, a short sale can be one of the most time consuming types of real estate transactions because the seller and lender(s) must agree to the terms of modifications of the seller's mortgage obligations.

Long Answer

A short sale is an alternative to foreclosure or bankruptcy. It is a way for homeowners that are in financial distress to sell their property for less than what they owe on it, ultimately with the bank or banks(if there is a second mortgage) taking a loss to avoid foreclosure. Since it is very expensive and time consuming for banks to hold and try and sell foreclosed homes, in most cases, not all, they are willing to work with the sellers. For example, if a homeowner paid $330,000 for a home 2 years ago, owes $300,000 on their mortgage, but due to the declining market in their area they are only able to sell it for $240,000, the bank would have to agree to take a $60,000 loss in order for them to sell. The homeowners of course would walk away from this situation with no equity.

Seller of Short Sales Short sales do affect a seller's credit, but in most cases not as long as a foreclosure on record would. The extent that it would affect their credit can vary and depends on many other factors. Depending on how the sale is negotiated, there may or may not be taxes ramifications in the future. That is something each individual would need to understand when working with their agents and banks, since all negotiations are different. Most experienced agents will ask the sellers for a list of financial items need, collect those, and then do the rest of the negotiating for them. Sellers do have to provide a letter proving hardship in order for banks to consider approving the transaction.

Buyers of Short Sales If you are considering buying a short sale property there are many things to consider, besides just thinking about the good deal you are possibly snagging (although that can be exciting). First, the process for the bank to approve the transaction could take up to 60 days in length, so you need to have patience and the time to wait. Also, the closing date could be changed or extended if needed to make everything work, extending the process even longer. Another thing to consider is that most short sales are sold as-is, so that means the seller will not be making any repairs for you. Those are just a few things to consider. I have a list of additional things to understand about short sales that I give my buyers if you are interested in a copy.