What is a Short Sale?

Throughout your home search,  you are bound to come across some short sale listings these days.  Short sales can be great opportunities for buyers but the process involved in buying short sales is a bit different from buying a property that is not in a distressed situation.

Let’s start by defining what a short sale actually is.  A short sale is attempted by a homeowner when there is some sort of financial distress present that has caused them, or will cause them in the near future, to not be able to make their monthly mortgage payment.  When you don’t make your mortgage payments, the bank will eventually foreclose on the home.  One of the favorite jokes of  the closing attorneys at a closing when they come to this clause in the paperwork is “If you don’t pay…you can’t stay”.

Short Sale is an alternative to foreclosure.  Instead of missing mortgage payments and waiting for the bank to inevitably foreclose on them, Sellers may have the option of a short sale.  We will discuss the steps of the process in detail in this guide, but in essence, a short sale is when a Borrower who is in default or is soon to be in default on their mortgage, goes to their Lender and asks them to accept less than what is owed on the home, in lieu of foreclosing on them.  Short Selling a home is only practical when the home is worth less than what is owed on it.  The seller will put their home on the market (usually at a discounted price) and get an offer from a ready, willing and able buyer to take to their Lender.  They will ask “will you take the amount of money that this Buyer is offering on the home today instead of foreclosing on me?”  The Lender will run the numbers and make a decision on whether it would be more beneficial to them to take the offer in hand, or foreclose on the house and sell it themselves.

In this process, the home owner negotiates and accepts the offer from the Buyer, but the contract is contingent on the bank approving a short sale.  The owner’s agent then begins the long process of negotiating with the owner’s lender to take the amount of money that the new buyer is offering to pay for the house in lieu of foreclosing on the owner, and then releasing the owner from the difference owed.