What Is A Short Sale?

Not long ago, few people knew what a short sale was. Now, thanks to the distressed housing market, short sales are happening in record levels. If you’re buying or selling a short sale, there are a lot of hoops to jump through. It’s wise to know what you’re getting into before you take the first step.

Short Sale—The Lender

In a short sale, the lender agrees to accept a mortgage payoff amount that is less than the balance owed. Typically, the lender forgives the remaining balance.

A lender will not consider a short sale if:

• The loan is current – If the homeowner is making regular payments, the lender has no reason to think he can’t continue making them. Usually, a notice of default must be issued in order for the lender to consider a short sale request.
• The homeowner declares bankruptcy – Negotiating a short sale is considered a collection activity, which is not allowed in bankruptcy.

The only benefit to the lender is that a short sale is faster and less expensive than a foreclosure. Once it is clear that foreclosure is unavoidable, a lender is more likely to approve a short sale request.

Short Sale—The Homeowner

If a homeowner is considering a short sale, times are tough. They’re about to lose their home without a profit. And, they must endure the emotional stress of convincing the lender to allow them to do it.

Throughout the process, the homeowner’s focus is convincing the lender that a short sale is the best option.

• A homeowner must prove that he will not be able to bring the mortgage current, and that there are no assets—cash, savings, cars, etc.—that can be used to catch up.
• The homeowner must also prove that the local housing market is so depressed that the home won’t sell for enough to pay the mortgage.
• Most lenders will require a signed contract with a buyer to consider a short sale.
• The homeowner must make sure the short sale agreement includes a waiver of the lender’s right to pursue them for the remaining balance of the loan.

A short sale is not a do-it-yourself deal. A real estate professional who’s experienced in short sales is essential.

Short Sale—The Buyer

The first thing a buyer should know about short sales—they take forever. If your timeline is any shorter than three months, don’t even look at short sales.

Second, all-cash buyers are more likely to be approved. If you’re getting a mortgage on the home, you’ll need to be pre-approved and put up a significant amount of earnest money.

More issues buyers should be aware of:

• Do your homework – What looks like a good deal may not be. A buyer needs to work with a real estate agent to know what home values are.
• Watch out for low-ball lenders – Sometimes lenders will set a short sale price artificially low in order to attract bidders, then they’ll jack up the price during the bidding process. Again, a real estate professional will help a buyer know what offer to make.