What is a Short Sale?

A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for.

A short sale is when a bank, Mortgage Company, or other lender accepts a reduction on a mortgage amount to avoid a foreclosure or bankruptcy. The basic premise leading to a short sale is when somebody owes about what the property is worth, or they owe more than what the property is worth, usually because the value of property has dropped in that area since they purchased or refinanced the property. The value of the property is determined not only by the market but also by the condition of the property: so, it could be a property in a good location, but it is in a state of neglect or disrepair which puts it’s value below it’s mortgage balance; or it could be a nice property, but all of the other nice properties, the comparables, in the area are selling for less than the balance of the current mortgage against the property because of a downturn in the real estate market. So, when a property has no equity, it creates a perfect opportunity for a short sale. 

Why are banks willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction that they would be better off taking the discount beforehand and be finished with the headache of it all.

But, why don't people just sell the property and pay off their mortgage? Well, if they don't have any equity, then they won't even have the ability to pay a Realtor her or his commission. They could try doing a for sale by owner (FSBO), but they won’t even have the ability to pay closing costs, real estate taxes and other costs, meaning that they would have to pay these through money from the new buyer. And what new buyer would want to buy a property at or above market value and then pay extra for closing costs and taxes? They wouldn’t, which is why the property can’t be sold on the open market.

Furthermore, if the property owner is already in foreclosure and behind on their mortgage payments, they might have additional taxes that are owed and they might have interest and penalties that have been tacked onto the mortgage because the mortgage could potentially be going up at this point.

Here are some scenarios that create distressed situations for property owners: they lose their job, or a spouse loses a job, or there is an extended illness in the family, or there is a short term disability which turns into a long-term disability, or there is a divorce and the one person remaining with the home finds that they cannot pay the mortgage, or the unforeseen burden of medical expenses severely impacts income. Whatever the cause, some people have found themselves over-debted, overburdened and overextended, and they find that they can no longer afford to pay the mortgage. And because the mortgage is more than the value of the house, they are denied the ability to sell the house on the open market and thereby get out from under their burden.

This very scenario has been happening in abundance simply because a lot of people have been taking out 100 percent loans: meaning 100 percent of the value of the property. Some lenders were even loaning 105 and 110 percent. And there you have a great recipe for a short sale deal: a lender (out of greed? Over-optimism? Myopia?) has loaned 110 percent on a property that has gone down in value. So short sales are a great opportunity in a really slow market because when somebody comes up against a hardship of some sort, or their mortgage balloons, and they no longer have the ability to pay the mortgage on a home that is worth less than what they bought it for, then they just want to get out from under that burden, but they don’t know how and they feel trapped. 

You are taking the first step by educating yourself on some of your options, and your home DOES NOT have to go into foreclosure.  Let me, the expert, help you... Please fill out the form below, and I will contact you shortly to discuss further. 

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