What Are Short Sales?

You may have heard the term short sale being used more frequently lately. A short sale is the act of negotiating the sale of a home with the lender and buyer before the home seller defaults. This can aid the bank and prevent them from having to endure a foreclosure. A bank pays up to $50,000 to handle a foreclosure and if they could avoid it completely, they would.

With a short sale, a bank is able to rid the home from their books and still get what they need to cover costs. When factoring in all the interest banks make from holding loans year after year, many have already made their money from a property before a short sale is entered into the picture. Therefore, anything a bank makes from the sale could satisfy their expected profit.

Here's an example of a short sale:

Mr. and Mrs. seller purchase their home in 2003 for $200,000. Since they've purchased the home, property values in the area have declined and their home is now worth roughly $175,000. Mr. seller loses his job and they can no longer keep up with the payments. They're terribly close to defaulting on their loan and racking up late fees and missed payments. (The first small snowball of foreclosure.) They talk with their bank and ask about their options. The bank tells them that since they don't have any missed payments, there's nothing they can do. Mr. and Mrs. seller are shocked and don't quite know what to do. It makes no sense really but the bank figures since you've been responsible so far with payments, you're going to continue at any cost. (Most institutions.)

Mr. and Mrs. seller decide to contact a real estate agent that handles short sales and put the home on the market. They will need an offer to present to the bank and they will need to show their income loss and prove their financial situation. A buyer comes in and offers $170,000 for the home. The offer is presented to the bank and submitted for approval. The bank will need to be negotiated with and the proper department will make the call.

The bank weighs up their possible loss in the future by going through a foreclosure and what they can make from the sale or at least break even. It's smarter for a bank to break even on a property than lose money in the future. The bank orders an appraisal to make sure the home is currently valued near or at the offer amount and justifies the price. If everything checks out, and they approve the sale, all parties walk away breathing a sigh of relief.

Short sales are typically complicated and take a while to get through the system. Closes are usually delayed and patience is required by both buyer and seller. It's sometimes beneficial for the buyer to get their loan through the bank that is holding the current loan as the banks favor this and benefits from it. Sellers are able to relieve themselves of their home's value situation and responsibility, buyers are able to sometimes find a deal and a great home and banks are freed of the nightmare that is another foreclosure and financial hassle on their books.