What Is a Short Sale?

Rachel was talking to her friend Emily who just sold her house.

Rachel: Wow, your house sold already?
Emily: Yes! It was only on the market for 5 days! It worked out perfectly because I need to move to England tomorrow.
Rachel: You are really lucky to have gotten a short sale!
Emily: Thanks, I know!

Rachel and Emily both think that a short sale is when a house sells quickly. They are wrong. Let's take a look at the real meaning of a short sale.

A short sale is when a property is sold for less than the remaining balance on the mortgage, so the seller, who is no longer able to make mortgage payments, can avoid foreclosure. For example, the remaining balance on a mortgage is $250,000, but the home is sold for $200,000. In order for the bank to accept a short sale deal, the lender must see some potential gain in granting a short sale; so technically, not everyone can qualify. When a short sale transaction occurs, the seller does not make any money off of the deal, however, in most cases they are not required to pay the remaining balance of the mortgage.

From the buyer perspective, due to the increasing number of short sales in the market, buying one of these homes may be on your agenda. After all, buying a home at a lower price sounds like a sweet deal right? Obviously there are some potential drawbacks as well.

Below you'll find pros and cons for both the buyer and seller.   

Pros:

• Sellers do not have to go through the lengthy and tedious foreclosure process.

• The seller's credit score is not as affected as it would be if they were to foreclose. Foreclosures are one of the worst things to have on your credit report and they can hurt your score by 250 points before the foreclosure stage will make it easier for you to qualify for another loan in the future.

• Sellers are in control of the sale, not the bank. Although the seller will not receive any money from the transaction, they maintain some control of the sale. The seller is involved in the sale of the house, whereas in a foreclosure, they are not.  In this way it might not feel as though the bank is taking something out from under you.

• Sellers may still be able to buy another home quickly (depending on their situation). If you have not fallen more than 30 days late on your mortgage payments, and are not required by the lender to pay back the rest of the loan, you may qualify to buy a home right away. In the case that you have fallen behind, the wait will be between 2-3 years. This is still shorter than the 5-7 year wait after a foreclosure!

• Buyers can often receive homes at reasonable prices. Buying a short sale can be awesome. In many cases you can find a home for far less than the market value.

• Buyers will experience less negotiation. By the time the buyer comes along, the seller and the lender  have come to an agreement on how much they will ask for the home. The buyer can come in and make their purchase without the price war that ensues with regular transactions.

Cons:

• Sellers might still have to pay the rest of the loan. The lender may expect you to pay the rest of the money you owe on the mortgage.  When discussing the terms of the short sale, ensure that both parties are on the same page as to what is expected.

• Seller's credit scores are still affected. Sellers should know that although a short sale looks better on your credit report than a foreclosure, your credit score will still be affected. The short sale will likely lower your score by around 100 points.

• Buying a short sale is not just a walk in the park. When buying a short sale there is going to be extra paperwork involved. It is different than a regular transaction, so be prepared for a bit more work.

• Buyers might have to purchase the home "as is." Lenders may refuse to pay for repairs, so you may be stuck with what you see.

• Buying a short sale may not be the best deal you have ever made. The seller may have paid too much for the property and therefore you aren't really getting a deal on the property.  You might be paying what the house was always worth. Just be informed before you buy and know what you are getting into.

Whether you are buying or selling a short sale, hopefully this information helped you better prepare for your future endeavors.  I encourage you to explore this topic further, because the more you know the better off you will be.