What Is a Short Sale & What Happens When You Sell Short?

If you have heard of a short sale, you may have also heard mixed messages about what a short sale is, or more precisely, whether it’s a good thing or a bad thing. In general, a short sale can be a good thing, but buying a home through a short sale is a more complex process than buying a property under regular circumstances. Confused? Let’s clear up the matter of what a short sale is and whether it’s right for you.

What Is a Short Sale?

A short sale is a home that is sold by a homeowner who is in financial distress. The home has not yet been foreclosed on and the lender has agreed to sell the home for less than the outstanding balance owing on the mortgage. This is often a situation in which the homeowner has missed multiple mortgage payments and the value of the house has gone down so the sale will not be enough to pay off the mortgage.

 

The Difference Between a Short Sale and Foreclosure

We touched on the idea of foreclosure above. A short sale is different from foreclosure on a home. With a short sale, the homeowner still has possession of the home, and they work with a real estate agent to put the property up for sale. The sale will proceed in much the same way a normal sale would, except for the fact that the lender must approve every aspect of that sale.

In contrast to this, in a foreclosure, the lender takes over ownership of the property. When this happens, the homeowner is completely out of the picture and the lender is responsible for putting the home up for sale, with the goal of recovering as much of the outstanding mortgage as possible. If the homeowners are still living in the foreclosed home, they will be evicted.

 

Is a Short Sale Good for the Buyer?

It is important to keep in mind that if you are choosing whether to buy a home that has been foreclosed on or a short sale, the short sale is the better option for the lender. This is because they are likely to recover more of the cost of the mortgage balance owning and can avoid paying the legal fees that go with selling the home themselves.

But is a short sale the best option for the buyer? Compared to buying a foreclosure home, the answer is yes because the home is likely to be in better repair than a home that has gone into foreclosure. Buying a short sale is also likely to get you a good deal on the price, while operating like a traditional home sale.

However, keep in mind that a short sale can take a long time to go through, typically much longer than the traditional 30 days. In addition, you will be buying the home as-is, which means there is no negotiating conditions in which the homeowner makes repairs prior to the sale going through. This means you may be stuck having to pay for repairs or other issues yourself. Finally, the sale may not be approved by the lender. You could spend many weeks waiting for word on your offer, only to have the lender turn it down, which is why it is important to make a good offer.

 

How Does a Short Sale Works?

As mentioned above, a short sale is a more complicated home buying process than a regular sale because the lender has to be involved at every stage. The steps in a short sale are as follows:

  1. The homeowner will speak with their real estate agent and their lender about doing a short sale.
  2. The homeowner will provide their lender with a short sale package, as well as proof that they can no longer make payments on their mortgage and do not have assets that would allow them to catch up on payments.
  3. The home will be listed by the real estate agent.
  4. When there is an interested buyer, a sales contract will be drawn up based on the buyer’s offer.
  5. The sales contract will be sent to the lender for approval. Even if the seller and buyer are in agreement, the sale cannot go through without the lender’s approval. The lender may accept or reject the offer outright, or they may reject the offer but provide the terms under which they will accept the offer.
  6. The buyer can accept the lender’s terms or counteroffer. Negotiations can continue until an agreement is reached or the buyer or lender walk away.
  7. If the sales contract is approved, the sale of the property closes, and the buyer takes possession. At this time, the lender gets all of the money from the sale and the seller is released from their obligation to pay off their mortgage.

 

Food for Thought

While short sales were common between 2008 and 2012, they are far less common today. The value of homes is up, inventory is limited, and it’s a seller’s market. However, there is no telling when short sales will become available once again. And that means if you are in the market for a new home on a budget, it’s good to have an understanding of what a short sale is and how it can benefit you.

 

Reach out to one of our team members today to find out more about what a short sale is and whether this type of real estate deal is right for you or, discover if there are other new home opportunities that you can have at a similar price point.

 

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Published 01.27.22

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