A short sale occurs when a homeowner sells their home for less than they owe on it. For example there would be a short sale situation if a homeowner could only sell their home for $170,000 even though they owe $200,000 on it. In order to complete a short sale the homeowner has to get approval from the bank holding the mortgage as they have to agree to accept less than full repayment.
Basically, a short sale is the sale of a property at a price less than the loan amount outstanding. The lender which agrees to accept the short sale proceeds either effectively forgives the portion of the debt that remains or may require the homeowner to agree to repayment of the remaining amount, by signing a deficiency note.
In a soft real estate market, many property owners are unable to sell their properties at an acceptable and profitable price. The declining values of properties are forcing homeowners to recognize that they may be in an “upside down” position, meaning that they owe more money on the property than the property is worth. Homeowners who cannot wait out the real estate cycle, and who are in financial distress, consider short sale as an acceptable alternative to foreclosure. Before a seller can actively list the property as a short sale, they must contact the lender of record for approval.
The lender may accept the request for a short sale, provided that certain conditions are met, including evidence of an inability to make the payments as a result of financial hardship by the current homeowner. While a short sale means that the seller seeks no monetary benefit from it, the long term benefit will be to protect their credit rating, as a foreclosure negatively affects a homeowner’s creditworthiness significantly more than a short sale transaction.
Lenders and banks are receiving an increasing number of short sale requests as a result of the sub-prime crisis, and lender approval for a short sale may take as long as a month. The lender benefits from a short sale as an alternative to foreclosure, as the foreclosure process tends to be protracted and expensive.
A potential buyer of a short sale can reap the greater benefit, as they will obtain a property that may be at a price well below the market. As with any real estate purchase, the buyer should investigate the property before committing to it, as the property may be sold “AS IS.” The buyer should also be sure to have a title search done on the property, to ensure that the only encumbrances to it are the lender who is party to the short sale.