What is a Short Sale?
A form of pre-foreclosure sale where the lender / bank has agreed to accept an amount that is less than the remaining mortgage amount. Normally in a short sale, the buyer and seller negotiate to an agreed price. Then the lender must approve the short sale. The lender makes the decision to approve or not based on the real estate market, an opinion of the value of the home and the cost incurred with the foreclosure process. If the short sale has a smaller financial loss for the lender in comparison to the likely result of foreclosure and bank-owned sale, the lender normally will approve.
Short sales typically were only approved if the owner / borrower was late on payments. Now that is not always the case as some lenders are willing to approve short sales even before a notice of default is issued to the borrower. Generally lenders are more willing to accept short sales now than ever before.
Some key benefits to short sales:
- For the owner / borrower, a short sale has less of an effect on the credit report & score than a foreclosure does.
- For the lender / bank, a short sale is typically faster and less expensive than a foreclosure.
- For the buyer, a short sale can result in being able to purchase the home for a reduced price.
- My experience has been that there tends to be a lot less damage done to homes that are involved in a short sale as compared to homes that are foreclosed on.
Some key disadvantages to short sales:
- They can take significantly longer to close due to the bank approval process. Some banks take up to 2 months to return an approval answer and most banks will only process one offer / contract at a time.
- Often, there are other lien holders (second mortgage lenders, HOAs, taxing authorities, mechanic's lien holders, etc) who need to approve the short sale as well and are often difficult to locate.
- Some banks still hold the owner / borrower liable for any losses after a short sale. In addition, it is very unlikely other lien holders (HOAs, taxing authorities, mechanic's lien holders, etc) will agree to forgive the balance(s) owed.
- Although short sales affect a person's credit report less than a foreclosure, short sales are still classified as a settlement. This settlement is typically still reported on the credit report and stays there for 7 years.
- If the correct contract documents & addendum are not used, there can be contention as to when the contract is in effect. Whether it is when the buyer & seller agree or when the bank approves can make a huge difference for right to terminate option periods and mortgage approval periods.