Short Sale Basics

The definition of a short sale in real estate is:

A sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. The bank of mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt.  In some cases, the bank will apply a deficiency balance to the property owner.

Here is an example:

A homeowner buys a house for x amount.  Owner loses their job or the ARM is up on their loan and they are not able to refinance, which in turn prevents them from being able to make their mortgage payments. The bank agrees to let them sell the house for market value, but below the original loan amount.

The transaction typically goes like this for a buyer:

1.  Write offer on the house

2.  Seller approves, rejects or counters the offer

3.  Offer goes to the bank and the bank either approves, rejects or counters (depending on the bank this could be up to a 6 week process, but it really depends on who holds the loan)

4.  Proceed with inspections etc.

The transaction typically goes like this for a seller:

1.  Negotiate with your bank to see if they will accept a short sale (less than you owe).  You can do this yourself, some real estate agents do this, or a loss mitigation company can be hired.

2.  List the house with a real estate agent at market value (what a willing buyer would pay to a willing seller, both in a free market, for an asset or any piece of property).

3.  Get an offer and approve, reject or counter it.

4.  Offer is sent to the bank to be approved, rejected or countered.

5. Transaction then proceeds as normal if approved i.e. inspections etc.

6.  Close

7.  Bank takes the payoff and either calls it good or attaches a deficiency judgment (personal debt like a credit) to you for the balance of the loan.

January 30, 2009 · Filed Under Real Estate Edu

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