What is a Real Estate Short Sale?

6 months ago

A short sale is a last ditch effort that a home owner can use to pay off his mortgage, if he has fallen behind on payments and is facing foreclosure.  A short sale in the simplest terms, is selling the property for less than the balance on your mortgage.  If you still owe $100,000 on the mortgage, but you can only sell the home quickly for $80,000, that would be a short sale, but it is not quite that simple.

Let’s examine this in a little more detail.  If you purchased your home for $200,000 before our current economic climate, you probably felt confident you could make your payments.  Homes were rising in value and were a great investment. Suddenly our economy took a turn for the worse, and you or your spouse may have lost your job.  Suddenly those payments look huge, you can’t afford them.  Then to make the problem even more daunting, the other homes around you are now either not selling, or selling for extremely reduced prices.  Your $200,000 home is now only worth $140,000 and you still owe almost $160,000.  You need to get out from under the loan, but obviously you can’t sell the house for the full amount of your mortgage.

Most people would assume that foreclosure is the only step remaining in this picture.  This is where a short sale comes into play as a potential additional option.  You would need to get an accurate estimate of your home’s value.  This could be in the form of an appraisal, or a broker’s price opinion.  Next comes one of the hard parts, finding a buyer interested in buying your home, at a price near the appraised value.  You will need to get a signed deal, that is contingent upon your lender approving the deal.

Now comes another hard part.  Presenting your deal and your case to your lenders customer service department, and getting approval to sell the property at a price below the remaining balance of the mortgage.

Here is where you need to be really careful.  The lender may agree to the short sale, but still want you to pay the difference between the sales price, and the balance of the mortgage.  In our scenario this leaves you with a $20,000 debt and no equity.  That does not help.  If you’re lucky, your lender may approve the short sale, accepting the proceeds from the sale as payment in full for the loan.  Another place you need to be cautious, if you are using a real estate broker to assist you with this process they will be getting a commission.  You need to keep this cost in mind when figuring your total costs and risk.

Why would the lender accept such a deal?  Foreclosures are time consuming and costly for them, also.  They may have too many foreclosed properties to deal with, especially in our current market.

If you are struggling with your home payments, you many want to further explore the option of a short sale of your home.


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