What is a Short Sale?

Simply put; a Short Sale is the term used when a property is being sold for less than what is owed in loans against the property.

For example; if a home with a fair market value of $100,000, with outstanding loans against the property of $150,000 is put on the market, it would be considered a short sale. The funds expected to be received from the sale of the home would be short of covering outstanding loans and selling expenses.

There are several possibilities at this point: One, the current owner could sell the home and cover the difference between the sale price and outstanding loans and expenses. Two, the current owner could request that the lender cover the difference. With the lender’s permission the home could be sold at the lower price and the bank would be forced to absorb all or some of the loss, but would be saved the additional expense of foreclosure. The third option is to allow the lender to foreclose on the property, in which case, it would be a foreclosure and not a short sale.

An important consideration in loans against real estate is that in specific cases, if the sale of the home does not cover the amount of the loans against the property, the lender cannot go after the borrower for the deficiency. Always consult with an attorney for more detail before considering a short sale. Real Estate laws can be very complex and only a qualified attorney can give expert advice on the legal ramifications of short sales and foreclosures. If in doubt see an attorney—it could save many thousands of dollars. There may also be serious tax consequences. Therefore, it is also recommended that a tax professional be consulted.

Before most lenders will even consider a short sale the borrower must demonstrate a hardship. Most lenders will not even talk to a borrower unless they can prove they have a hardship of some type. Examples of hardships are loss of employment, major illness, loss of a spouse or other serious event. Once a hardship has been established the lender may offer many different options. The lender might modify the interest rate or might even reduce the principle on the loan. There are hundreds, if not thousands of considerations that must be taken into account before deciding to proceed with a short sale. The complexities of decision making concerning short sales more than doubles when additional lenders are involved.

Before making an offer on a home listed as a short sale it is vital that the seller have written permission from the lender(s) to proceed with the short sale. Even with permission short sales are difficult and time consuming. From a lender’s prospective they see the foreclosure costs as minimal—in AZ it averages about $2,000. Since most loans are insured the lenders insurance company is also involved. The extra administrative costs for the lender of handling a short can easily exceed the cost of foreclosure.

Additionally, the lender is under no obligation to accept a short sale and may select other options, such as, loan modification, foreclosure, or other offers right up until the moment that escrow closes and title transfers. The buyer should also be aware that there may be other liens which must be cleared such as, home owner association dues and penalties, assessments, property taxes, judgments and more. Generally speaking short sales take longer to transact—primarily because of the decision making process and additional administration required of the lender. There have been horror stories of taking up to six months to close. Being involved in a short sale can be time consuming and frustrating.

Despite all of the potential problems short sales can be a good way to find exceptional values, but they must be approached cautiously.