4 Things to Know about Real Estate Short Sale

Whether you are buying or selling, the prospect of a short sale can be cheering in the current real estate market. For buyers, a short sale offers the opportunity to get a great deal on a home purchase. For a seller, the short sale offers the opportunity to unload a home that has been difficult to sell at a price that would mean the discharge of the remaining balance on the mortgage.

house for sale

The current market has led to an increase in the number of short sales performed, and, consequently, the interest in short sales has likewise increased. While a short sale can provide opportunities for buyers and sellers, it’s important to realize that not all short sales go through. Whether you are looking to buy, or hoping to sell, here are some things you need to understand about short sales:

The Bank is In Charge

Before you get excited about a short sale, it’s vital that you understand that the bank is in charge of the transaction. As the lender — and the party that stands to lose the most from a short sale — the bank decides whether or not the short sale goes through. It’s important to remember that the mortgage lender likely has more true ownership in your home than you do. And, since it’s the bank’s money at risk, the bank decides whether or not to allow the short sale.

More Than One Lender May Be Involved

This approval process includes lenders that have provided you with a second mortgage as well. If there are more banks with a claim on the home, then the likelihood of being approved for a short sale goes down. It’s true that other lien holders have less of a claim than a primary mortgage lender, but there is still veto power. If a lender thinks that there won’t be much left over, the short sale may not be approved.

You Could Be Wasting Your Time for Nothing

In order for a seller to receive approval for a short sale, he or she must prove that the house won’t likely sell at a price that pays off the mortgage, and that there is financial hardship involved. Potential buyers should find out whether a home listed as a “short sale” already has approval from the bank before proceeding. If the homeowner hasn’t received approval — or even submitted a package — you could be wasting your time hoping the short sale goes through later.

Before you go down this roard, realize that the entire process could take several months to complete.

Sellers Need to Show They Can’t Afford the Mortgage

Normally, if a seller decides to sell a home for less than what is owed, he or she is required to make up the difference. If the bank approves a short sale, though, the remaining amount owed is forgiven (remember that the IRS views this as income, and the seller will need to pay taxes on it). Before the seller is approved, though, there are some hoops to jump through. Normally, in order for a bank to agree to a short sale, the following conditions have to be met:

  • The home isn’t selling at the current price that would pay off the mortgage. Many banks like to see that the home has been on the market for at least 90 days at a higher price before agreeing to a short sale.
  • Financial hardship means that the mortgage payments can’t continue to be made on the home. This can include loss of hours, or loss of a job. If the seller can’t make the mortgage payment, it might be worth it for the bank to allow a short sale.
  • The seller’s assets are insufficient to pay off the remainder. The bank also wants a look at accessible and liquid assets. If the seller has a savings large enough to pay off the difference, the lender can demand that, rather than allow a short sale.
  • Private mortgage insurance won’t provide a big enough reimbursement. It’s true that foreclosure can be a pain for the bank, but private mortgage insurance can ease the pain. The bank will likely weigh the costs associated with each option, and whether an insurance payout can make foreclosure desirable.

Because there is so much involved, many short sales never go through. It’s hard to close on short sales because the bank has to be willing to lose the money. However, in some cases, the short sale does turn out to work well. If the bank doesn’t want to deal with the short sale, it’s possible that it can be approved. Sellers, though, need to be upfront with the bank, and get approval before trying to sell their home under those circumstances. Buyers should discover the situation early on to avoid an unpleasant surprise later.

Photo from Wikimedia Commons.

About the Author

By , on May 21, 2013
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{5 Comments}

  1. Thanks for a very clear explanation of a complex system. Good pro/con analysis.

  2. Mary Slagel says:

    I’ve read a lot about the real estate market but this is new and fresh information I haven’t seen to much of on other pages. Thanks for the post!

  3. Alex says:

    I understand how they can be a great way to get a foothold in a property market that you might not otherwise be able to afford, but short sales do seem VERY complicated.

  4. This is of course a sad business. Someone buys a house that it turns out for some reason or other (quite probably not their fault) they can no longer afford. So they have to sell their home, into which they may have put quite a bit of work and hope. We don’t have ‘short’ sales in the UK – if things go wrong generally it is a foreclosure and the house gets sold at auction. But that may be because our housing market is much less volatile and even now it is growing, particularly after stupid propping up by the government.

  5. Money Beagle says:

    I’ve always heard that short sales are very complex, probably more so than foreclosures. But, they have an advantage over foreclosure and regular sales in that you typically have a better chance of getting a move-in ready house but at a lower cost. Best of both worlds but obviously there are a lot of complexities and risk of fall-through. If I were entering the market for the first time, I’d probably put some time here just because of the potential payoff.

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