What is a short sale? It is a question often asked with a furrowed forehead, an invisible question mark above the head of the asker.
Does it mean the sale happens in a shorter time frame than a regular sale?
Is it a good deal, because you get it for less money?
What does ‘short’ mean exactly?
Even once you know what it is, there are still more questions.
How does it work?
Are there any guarantees?
What differences are there between a short sale and a regular sale?
Let’s take a closer look at what is a short sale, how it works, and what you should know before you consider making an offer.
What is a short sale?
The most concise answer is that a short sale occurs when a homeowner sells their property for less than the outstanding mortgage. It is not the same as selling the home for less than its appraised value. A short sale is also different than a bank owned property or REO because the borrower still holds title as opposed to the lender.
Here’s an example: Six years ago, you borrowed $230,000 to buy a home that was worth $245,000. You have lost your job and are falling behind on your mortgage payments. You have also learned that your home has dropped in value and is now only worth $165,000. You still owe $195,000 on the mortgage. A short sale would mean that you sell the home for $165,000 and that goes to your lender to pay off your mortgage.
In a short sale, your lender would consider your mortgage paid in full, despite selling the house for $30,000 less than what you owed on it.
Lenders and homeowners leverage short sales as an alternative to foreclosure.
How does a short sale work?
A short sale takes place usually when the homeowner is in default on their mortgage. On top of that, the value of their home has dropped, typically by at least 20%. However, being in default is not a requirement. The lender may be willing to consider a short sale when the homeowner is current on their payments, but the value of the home has fallen.
In a short sale, the bank that lent the homeowner the money stands to lose much money. For this reason, the borrower must provide evidence explaining why the short sale is the best option for them.
Once the bank agrees that a short sale is the best option and gives the go-ahead, buyers work with the homeowner to determine the details of the transaction. Once they have hammered out a deal, the buyer then provides the bank with those specifics to get final approval of the short sale.
The short sale process is paperwork-intensive and rather lengthy. Short sales may take up to a full year to complete. There are typically three steps to the short sale process:
- Short sale package: This is a financial package prepared by the seller and submitted to the lender. It usually includes a letter detailing the seller’s hardships and reasons for the short sale, including financial statements and copies of records.
- Short sale offer: If the seller finds an interested buyer and accepts their offer, then the listing agent prepares a package with the listing agreement, executed purchase agreement, a preapproval letter for the buyer’s loan, the earnest check, and the seller’s short sale package.
- Bank processing: The bank reviews all the documents and then either approves or denies the loan. It is this bank process that can take weeks or even months.
There are several reasons that a lender may not approve the short sale including:
- The homeowner has the money to pay the mortgage and has failed to prove to the lender why they cannot pay it.
- The lender has determined that the private mortgage insurance protecting the loan would reduce their loss and they will foreclose on the property instead.
- The house is already in foreclosure, and the process is too far along to complete a short sale.
- The homeowner has filed for bankruptcy. A short sale is considered a collection activity, thus prohibited in a bankruptcy.
- The lender initially approved the short sale, but the homeowner failed to contribute to reducing the lender’s loss.
- The short sale is unlikely to close due to subordinate liens such as a contractor filing a mechanic’s lien for unpaid labor.
Things to understand about short sales
A short sale is, in many ways, no different than a traditional real estate transaction. The property is listed for sale where a prospective buyer can view the property and make an offer. However, there are some significant differences. These differences can both complicate the process and make a short sale less appealing to many buyers and undoubtedly some real estate agents as well.
Offer submission before approval may be required
Even if the homeowner submitted their completed short sale package, the lender might not evaluate the request for a short sale until a buyer makes an offer. An offer requirement makes the process take longer than a traditional purchase and sale. If you are going to make an offer on a short sale, you should not have a deadline and be prepared to wait. You should also be prepared for the possibility of denial and have a backup plan.
Working with a licensed real estate agent is highly recommended
Short sales are very complicated, and navigating the process on your own could lead to mistakes that cause it to take even longer. You should look for a real estate professional that has extensive successful experience with short sales. Their knowledge and connections will help identify and possibly resolve potential hurdles, put together a reasonable offer, and negotiate the best deal while protecting your interests.
Understand the lender, not the seller, is driving the transaction
You are negotiating the terms of the deal with the seller, and in an ordinary sale, that would be it. In a short sale, however, the lender can counter the terms you and the seller have agreed to and offer something different. Ask a lot of questions, including whether there are outstanding homeowner’s dues and who will pay them, and if there are other liens on the home’s title.
Offer cash for the quickest positive response
If you have the ability, offering cash for the house will get you the fastest response, and more likely approval. However, if you prefer to obtain a mortgage make sure to submit your loan preapproval concurrently with your offer including a substantial deposit. Finally, consider not asking for seller concessions and limiting your contingencies to make your offer more attractive.
Is a short sale always a good deal?
A short sale can be an excellent deal. However, there are times when it may not be a good deal, whether that is due to finances or other reasons. A few times when a short sale might be a lousy deal include bidding wars that increase the price, additional lienholders requiring extra cash to release the liens, or ‘as is‘ sales with substantial repairs needed.
Now you have the answer to the question, what is a short sale? This general overview gives you a basic foundation of knowledge, but each short sale is unique. As with any real estate deal, you should proceed with caution and ask for advice as you move through the process. As always, please contact us or add a comment below if you have any questions or concerns.