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What's a "short sale" and is it a good thing? - I'm asked that question a lot. A "short sale" is accomplished when the Seller of a home successfully sells the home for less than total amount of loans secured by the property. In other words, the Bank(s), or mortgage note holder(s), takes a loss.

There are several factors determining a successful short sale. First, the Seller must show the bank that they are experiencing financial hardship and can not pay the mortgage. The Seller actually stops making payments on their loan. In addition, the Seller fills out a "hardship letter" - detailing their inability to pay the mortgage - along with a "short sale package." These circumstances prove to the Bank that the home will need to be sold through the foreclosure process if nothing is done. Once the Seller stops making loan payments the Bank will file a "notice of default." This is constructive notice that the Seller has stopped making the mortgage payment. Once the NOD is filed the Seller has 90 days before the home will be foreclosed upon. Since the Bank does not want to own real estate the opportunity exists for the home owner to sell the property at a loss to the bank but less than the loss if the Bank were to sell the home through foreclosure proceedings.

Other factors determining the success of a short sale are the number of lien holders, the actual loan amount(s) encumbering the property, the negotiation skills of the Seller's agent or representative, the Bank(s) negotiator's skills and the Bank(s) perception of the real estate market. In the case of multiple lien holders they all have to agree to the short sale and so negotiations have to be made with all. For example, if there are two loans on the property and the home is foreclosed upon, the loan in second position will only get satisfied if there are enough funds remaining after paying off the first loan. If the second lien holder perceives that there would not be any funds left over they may be willing to receive a small amount of compensation from the first lien holder for approval of the short sale. They would be wise to do so since "something is better than nothing."

A short sale can be a good thing for everyone involved. If negotiations are done well, the Buyer can purchase the property for under market value while the Seller avoids foreclosure and the credit implications associated with that. In addition, the Bank avoids further losses it would incur through the foreclosure process - especially in a depreciating market where time is critical to the Bank. The bad thing about foreclosures is that it can take months to complete the process - the Buyer should continue looking for other property and be advised of the lengthy process. In addition, there is always the chance that the home will end up in foreclosure if short sale negotiations are not successful.

There are several very important terms and conditions that any Buyer should have included as part of their offer to purchase a home in a short sale situation. Please call me if you would like further assistance in this matter.