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What is a Short Sale?

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What is a Short Sale?
4 min. read

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The language of real estate is ever-evolving, and it’s hard for the average seller or buyer to know what each term they come across actually means. One such term is ‘short sale’. 

You might have come across short sales while house hunting, or perhaps you’re struggling to keep up with your repayments and you heard that a short sale can help. You might be wondering exactly what it means, and how it works. Let’s take a look below.

The basics

A short sale refers to any sale in which the seller is forced to sell their property for less than the amount owed on their mortgage. As an example, imagine you took out a mortgage of $500,000 and still owe $450,000. If you were only able to sell your home for $400,000, your property would be listed as a short sale.

If a short sale property sells, the total earnings will be less than the remaining mortgage owed, meaning the seller and more precisely their lender, are losing money. Such a sale requires the lender to accept this loss and forgive the debt owed. As you can imagine, this isn’t always an easy sell and it can take banks and lenders some time to agree to such conditions.

How do short sales occur?

There are several reasons for a short sale to occur, typically the seller is desperate to sell, perhaps they have to relocate unexpectedly, or they’re unable to keep up with mortgage repayments. The fact that they cannot sell their home for at least the same price they bought it for could be down to a number of reasons. Typically, a fall in the local market is to blame, though other issues such as a property in need of major repairs, can drop the price considerably.

Short sale vs foreclosure

For the seller, facing a choice between a short sale and foreclosure is a bad place to be. However, a short sale is the preferred option for most sellers and lenders. A short sale is initiated by the seller, whereas the lender will force a foreclosure in an attempt to recoup their losses. In a short sale, buyers will deal with the seller directly, or via an agent, and negotiations are possible. With a foreclosure, the property is typically abandoned, or the previous owner evicted. They’re sold as-is, generally at auction.

A short sale is better for the seller’s credit, with many able to apply for new loans within a year or two. In the case of a foreclosure, the seller’s credit will plummet, as this is similar to declaring bankruptcy. It can be years before they’re eligible to take out a substantial loan again.

Lenders prefer short sales as they’re able to recoup more of the loan, without paying the additional costs of lengthy legal proceedings. However, they will still only consider a short sale under the right conditions. If you can afford to continue paying your payments, it’s highly unlikely they’ll agree to it.

How a short sale works

A typical short sale follows these steps.

  1. Proceedings start when the seller discusses the viability of making a short sale with their lender and/or agent. They’ll need to submit a short sale package to their lender, proving that they can no longer keep up with the payments and have no assets to aid them.
  2. Next, the seller will list the house for sale. It’s best to work with an agent who has experience in short sales, as they’re more likely to reach a wider range of offers, and their experience can be invaluable when offers start coming in. The agent should draw up a sales contract, which will be provided to any interested buyers. This contract must be approved by the lender, so even if both buyer and seller agree, it’s the lender that has the final say.
  3. The lender will look at any offers and study the sales contracts. They can then respond in a variety of ways, reject the offer, ignore it, reject the offer but detail the terms they would accept, or if you’re really lucky, they’ll accept the offer.
  4. The offer then goes back to the buyer, who can accept or reject the lender’s terms.
  5. Upon acceptance from the buyer, the typical sales procedure continues, with all the proceeds of the sale going directly to the lender. The sale closes, the new buyer moves in, and the seller, though they’ve made a loss, has avoided foreclosure, poor credit, and is able to move on with their life.

Short sales can be tricky for the seller, unattractive to the lender, and dicey for the buyer. However, they’re typically the lesser of two evils and can be a great way for a buyer to bag a bargain. Find out more about the benefits of short sales in our next post.

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