We are starting to see a few properties come on the market as “short sales”. I have had a few questions about them so it might be useful to go over them here.
What is a short sale?
A short sale is the sale of a house for less than the amount that is owed on the mortgage. Occasionally, an owner finds themselves in a position in which they absolutely have to sell their home, but find that their property is worth less than they owe.
Why do a short sale?
If an owner finds that they cannot make their payments and can plainly see that their situation is not likely to improve in the near future, it’s time to sell…NOW. But if they have recently purchased the home, or recently refinanced it to the maximum they may not be able to sell it for the amount owed. That’s where a short sale comes in.
Before the home goes into foreclosure it’s best to talk to the lender about the situation. You might be able to work out a lower payment temporarily or discuss with the lender the possibility of selling it for less than is owed. That would be a short sale.
How does it work?
You list the house for a realistic sales price. That is a price for which the house would actually sell. You need to let people know up front that this is a short sale and your acceptance of their offer is contingent on the mortgage holders acceptance as well. It is rare that the lender will agree up front to a sales price. They want to review each offer individually.
It sometimes takes a month or two for the lender to commit to an offer on a short-sale. That is the problem for buyers, most of them want to receive a commitment within a day or two. So, a short sale needs to be priced attractively to a buyer to make it worth their time to wait.
After the contract
After the lender commits to the contract you coordinate the rest of the transaction in a normal way. The lender will have some instructions and may need to sign some documents as part of the closing but it should proceed in an orderly way.
Is a short sale a smart move for the seller?
I have been told by people who know, (lenders, and title officers), that a short sale is better for your credit than either a foreclosure or a bankruptcy. That would be the primary reason that a seller would sell their home with a short sale. You would normally only do a short sale if the other choices are foreclosure or bankruptcy.
Why would a lender agree to a short sale?
If a lender is in a position to take possession of the house, why would they agree to a short sale? Because the process of taking possession of the house through foreclosure and then reselling the house costs a lender a lot of money. It has been reported that the costs to a lender may average as much as $50,000–$75,000. The lender may be way ahead if they take a $25,000 hit on a short sale.