What is a Short Sale?

Short Sale as defined by the author:

A real estate short sale results when a home owner's lender approves the sale of his/her property for an amount less than the home owner owes on the property.

In most cases, the home owner is either entering into some stage of foreclosure, or realizes that he/she is nearing entrance into foreclosure. Many lenders actually require the home owner to fall behind on paying the mortgage in order to agree to sell the property short of what is owed, however, it's my opinion that those days are running out.

Given the high foreclosure rates in much of the country, these mortgage holders have many reasons to sell their holdings short instead of pursuing the more costly avenue of foreclosure.

It's also usually advantageous to home owners who fall behind on payments to pursue short sale approval from their lender. A short sale is not as damaging to a home owner's credit as a foreclosure. In a short sale scenario, the borrower is not responsible to pay back the shortfall, but would be responsible to pay taxes on the amount as a forgiven debt. Beyond that, it's difficult to get a read on where that borrower will stand regarding future home purchasing, and it typically varies from lender to lender. Certainly, a short sale does constitute some type of credit penalty, however, as of now, it's still less of a penalty than undergoing a foreclosure.

Going forward, it will be interesting to see how banks & mortgage companies handle new borrower applicants who have gone the short sale route. It's by no means a new problem, but a problem that is increasing in frequency by the day.

The other side of this coin is the purchaser(s) of a short sale. As I've said before regarding buying foreclosures: Just because it's a foreclosure does NOT mean it's a great deal. Similarly, just because a buyer chooses to purchase a short sale does NOT mean it's a good deal. And when I say "good deal", I'm only referring to the economic investment value.

Don't get me wrong, there are many advantages to purchasing foreclosures & short sales, but it's important to do one's homework regarding the value.

An advantage to purchasing a short sale is the prospect of getting a good economic deal on price. Another advantage is dealing with a lender who views the property as more of a serial number or liability than the home owner who views the property as his or her home with all of the emotional attachment that home ownership brings. In other words, it can be a rather sterile transaction. The process can be a little less like a poker game. It's more cut & dry.

The disadvantages to purchasing a short sale have mostly to do with time investment, patience, & fewer options on negotiating the terms of the deal. It can take days, weeks, or sometimes months to get to the closing table.

As banks & lenders realize a need for system implementation in the short sale arena, the time investment will likely lessen, but until then, it's smart to lower one's expectations regarding the promptness of the lender's response. In short, be patient. This is easier to do when the purchaser is certain that the deal is worth waiting for, but no matter how good a deal a buyer thinks he or she is getting, it's often difficult to play the waiting game.

The other disadvantage to embarking on a short sale adventure is negotiating the terms. Typically, buyers & sellers compromise somewhere to make a deal work. In the case of a short sale, the lender who must approve the sale perceives that they are giving up a lot in the form of sale price, so they want to dictate the other terms of the deal. Most of these sales are "as is", so the buyer can perform inspections on the property, but the seller/lender will forego any resonsibility to make repairs, corrections, or replacements to the property. This isn't always the case, but for the most part it is.

The lender/seller will also likely stipulate a fairly aggressive deadline to close the sale. This is ironic in a sense because it is often the lender that drags its feet in responding or approving the offer, only to then demand a quick close.

My advice is be prepared to wait, but while you're waiting, work closely with your agent in coordinating all of the details that result in a smooth closing. That way, when the lender says it's time to close, you're ready to proceed quickly.

For more information or a list of short sale opportunities, please e-mail me at cthomas@mulloyproperties.com

*Disclaimer: The information included in this post is based on the experience of the author in representing sellers & buyers in short sale transactions, and should not be relied upon for tax or credit purposes. Specifically, the processes and results of executing a short sale can vary dramatically depending on the situation.