Short Sale Definition
A short sale is when a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property by a financially distressed owner. The lender forgives the remaining balance of the loan.
Buying a home through a short sale is different from buying a property at a foreclosure auction, or one that is actually owned by the bank, known as an REO or real estate owned property.
A short sale occurs only with the lender’s permission when a home’s value has declined, and the mortgage holder owes more than the home is worth. In this scenario, the homeowner has negative equity and may need to get rid of the home.
Is a Short Sale the Same as a Foreclosure?
A short sale is not the same as a foreclosure. In a foreclosure, the bank repossesses the property and then tries to sell it for enough to recover its costs. In a short sale, a bank accepts that it won’t recover its outlay, and it’s considered the better option than dealing with the red tape involved with foreclosure and then going forward with handling a separate transaction.
Who benefits from a short sale?
Short sales are a mixed bag for the buyer, the seller and the lender.
If you’re a seller, a short sale is likely to damage your credit — but not as badly as a foreclosure. You’ll also walk away from your home without a penny from the deal, making it difficult for you to find another place to live.
However, a short sale can forestall foreclosure and its negative impact on your credit. A short sale is less damaging than a foreclosure as long as the homeowner can persuade the lender to report the debt to credit bureaus as “paid in full.”
The buyer gets the property at a reduced price, but the property in all likelihood has its share of problems — think fixer-upper — and the deal needs to go through considerable red tape to make it happen. A lender may even require a buyer pay additional closing costs that might be normally assigned to the seller.
The lender takes a financial loss, but perhaps not as large a loss as it might if it foreclosed on the property.
In a short sale, the proceeds from the transaction are less than the amount the seller needs to pay the mortgage debt and the costs of selling. For this deal to close, everyone who is owed money must agree to take less, or possibly no money at all. That makes short sales complex transactions that move slowly and often fall through.
For the most part, everyone gets some sort of benefit in a short sale, although everyone gives up a little, too. In the end, a short sale is about staving off worse outcomes.
Should I Sell My Home Through a Short Sale?
Whether you should proceed with a short sale depends on your individual situation and what’s likely to work best for you in the long run. If you can’t afford your mortgage, and if home values have dropped in your area, you might not have much of a choice. A short sale might be able to help you preserve your credit to some degree by helping you avoid a foreclosure on your record.
Carefully weigh the options to decide what’s likely to work best in your situation, and then move forward with what you think is the best choice for you.
How Long Does a Short Sale Take?
A short sale can take as little as a few weeks or as long as several months. Because short sales are complicated transactions, they tend to be more time-consuming. Plus, the original lender needs to review the short sale offer to determine whether they will accept it. If the lender believes they can make more money by going through the foreclosure process, they might not accept the short sale proposal.
You can reduce the time it takes by working with a real estate agent that has experience with short sale transactions. A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Not all real estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training and a good track record. Having a real estate agent on your side who knows how short sales work — and who has negotiated others — will increase the chances of closing the deal.