What Is a Short Sale On a House?
A short sale in real estate is when a homeowner needs to sell their home, but the seller is “short” the equity needed to fully pay off the mortgage and all of the fees involved with selling. (ie. real estate commissions, escrow, title, etc.) In a typical situation, the homeowner would need to bring in the difference in the money owed in order to sell the property.
A short sale is different. In a short sale, we negotiate with the lender to accept less than the full amount owed to satisfy the debt, allowing it to be paid off “short”.
In a short sale in real estate, all of the fees involved with selling a home are paid by the lien holder (bank) and there is not any out of pocket expense for you (the seller).
Here is a simple example:
A person is selling their home for $500,000 when there is still $550,000 remaining on the mortgage. In this example, the difference of $50,000, plus the closing costs, and other fees involved with selling, is considered the deficiency or amount “short”. This will be the amount that is written off by the lender.
- A short sale allows you to sell for a price (market value) that is less than the amount still owed on the mortgage.
- In most cases, the difference between the sale price and the mortgage amount is forgiven by the lender. (Learn more about deficiency rights HERE.)
- A short sale does much less damage to your credit report and credit score than a foreclosure, which means you will be able to buy again sooner than if you went through foreclosure (foreclosures vs. short sales)
- You have the dignity of selling your home vs the bank kicking you out.
- A short sale allows you to stay in your home until the sale is completed vs the bank kicking you out.
- A short sale is completed on your time frame vs the banks.
- In a short sale, you pay nothing. The bank pays all of the fees.
- A short sale is 100% “as-is”. You do not need to make any repairs to your home.
What Is Required to Complete A Short Sale?
As your research short sales and read different articles about “what is a short sale”, you are going to find conflicting and often times incorrect information.
Here is what is required to complete a short sale:
- Your home’s value is less than the balance remaining on the mortgage plus fees involved with selling.
- You have an extenuating circumstance that puts you in a position that you either no longer can afford to pay your mortgage OR you no longer can stay in the home. (We have a detailed explanation of Short Sale Hardships that you can read more about HERE.)
Here is what is not required to complete a short sale:
- You do not need to be in foreclosure.
- You do not need to be out of work.
- You do not need to be behind on mortgage payments.
Understanding a Short Sale (Real Estate)
What is a short sale in real estate? The term “short sale” refers to the fact that the property is being sold for less than the balance remaining on the mortgage. Unfortunately, the process to go through a short sale is not “short”
While there are more than a few requirements to qualify for a short sale, the steps and negotiations that go on “behind the scene” with your lender(s) are quite extensive. They are very paperwork-intensive transactions and they are not an easy process. It is something that requires a professional or team of real estate agents with an extensive background in short sales and connections within the banks.
Overall, there are a lot of misunderstandings around short sales. One common misconception is that lenders just want to be rid of the property and will move quickly to get as much money back as possible. There are some cases that a short sale may be a “good deal”, but in reality, the lender will take their time to recover as much of their loss as they can. Just because a property is listed as a short sale does not mean the lender has to accept your offer, even if the seller accepts it. This is why you need an expert on your side.
We have put together a detailed explanation of the Short Sale Process that you can read through HERE.
Why Would A Lender Accept a Short Sale?
It all comes down to the numbers. Banks and the investors that own your mortgage are in the business of making money. In most cases, accepting a short sale is going to cost them less money than it would if they let your property go into foreclosure. Typically, the foreclosure process takes longer, the property sits vacant, there is more risk for vandalism or damage, and overall, the legal fees involved in the foreclosure process can be costly. By accepting a short sale, the lender is able to avoid the lengthy and costly foreclosure process.
Why Do Homeowners Choose To Do a Short Sale?
For homeowners, short sales are generally preferable to foreclosures for multiple reasons. A short sale can be used as a tool to delay the foreclosure process if you are already behind on mortgage payments and/or your home is already in foreclosure. A short sale will give you some control over the process and time to find another home, while a foreclosure happens on the bank’s terms and ends with property seizure and eviction.
There is not any cost to complete a short sale, there is generally less impact on your credit (a foreclosure will linger on your credit report for seven years), and there may be tax advantages to completing a short sale vs foreclosure. If successfully executed, a short sale can mitigate the financial fallout of an unfortunate situation.
In order for a short sale to take place, both the lender and the homeowner have to be willing to sell the house to the new buyer at a loss. The homeowner will make no profit (and also will pay no fees), and the lender will lose money selling the house for less than the amount owed.
Is a Short Sale Better Than Foreclosure?
Absolutely – While a short sale is never an ideal situation to be in, in almost every circumstance a short sales are going to be better than letting a property go into foreclosure. We have put together a detailed guide explaining the differences between short sale vs foreclosure. Some of the bullet points are:
- Buying Afterwards – You will be able to buy again in a shorter time period.
- Effects on Credit – A short sale will have less impact on your credit score.
- Deficiency Judgements – You could be responsible for the lender’s losses after a foreclosure.
- Taxes – After a short sale or foreclosure, there are potential tax implications and they can be minimized or eliminated in a short sale.
- Control – You are in control in a short sale vs the lender having the control in a foreclosure.
- Emotional Advantages – You avoid a “worst-case scenario” of foreclosure and are able to sell your home.
How is a Short Sale Different from a Normal Sale?
In many ways, short sales are similar to a traditional sale. Your home will be listed for sale and will market the home for a potential buyer. Everything happens the same until we receive an offer from a potential buyer on your home. At that point, the real estate transaction pauses, and then we begin the negotiations with your lender. Once we receive the approval from your lender, the transaction is “un-paused”, we start the 30-day escrow period and close escrow the same as a traditional sale.
A short sale is different from selling your home at a loss because you will not pay any fees or commissions (everything is paid by the lender). If you chose to sell your home for less than you owe in a normal home sale, you would be required to pay all of the fees and the amount that you would be short to pay off the mortgage.
When you complete a short sale, you will need the lender to approve the transaction. The lender will not be concerned that the sale is less than the amount owed, but will want to make sure the sale is at market value. You will still work with a real estate agent (or team of real estate agents), but it is crucial you hire someone with short sale experience.
What Is The Process of a Short Sale?
The short sale process is very similar to a normal real estate sales transaction. You will work with a real estate agent to market and find a buyer for your home. However, your lender will also be working with you and your real estate agent throughout the process. We have a detailed outline of the short sale process that you can read HERE. In short, the lender will:
- Complete an appraisal or BPO (broker price opinion) to determine the market value of the property.
- Collect financial and hardship information.
- Review offers on the property from the potential buyer(s).
- Negotiate and agree to the terms of the sale.
- Work with the escrow company and the buyer to finalize the sale of the property.
In many cases, we are able to negotiate for you to receive relocation assistance from the lender when your home sells, in order to use toward your moving expenses and to make the transition to another home easier.
How Long Do Short Sales Take?
You may have heard horror stories of a buyer and seller waiting six months or more, only to find out the offer on the property was declined. While this can happen, it is not typical and most likely the sign of an inexperienced agent handling the short sale negotiations. Lenders can accept short a sale within a month or two, but typically, short sale acceptance may take 60 to 120 days. The time frame could be slightly shorter or longer depending upon your specific situation, your property, and your lender(s).
Buying A Short Sale
Is it possible for a buyer to get a good deal on a short sale? Absolutely – A short sale may be a great opportunity for you to find a property that is a little bit below market value. Often times properties that are being sold as a short sale have some deferred maintenance and because of that, are being sold below market value. Make sure that your agent provides you with a list of recent active, pending, and most importantly recently sold homes in the area with similar characteristics for comparison. Don’t fall into the misconception that just because it is a short sale that it is automatically going to be discounted.
“As Is” Condition
If you are considering buying a property that is listed as a short sale, don’t expect any repairs to be done. Lenders will not pay for any repairs and often will not even pay some of the typical buyer fees that a seller would cover. Lenders expect the buyer to purchase the home in its current condition.
This can include important repairs and items like:
- A termite and pest report and clearance.
- Roof repairs.
- Other deferred maintenance on the property.
- Home warranty for the buyer.
Short Sale Buyer Guide
If you are a buyer and considering a short sale, or wondering “what is a short sale home”, make sure to read through our short sale buying guide to get a good understanding of everything involved with buying a property that is listed as a short sale.
If you have read through this and you are considering your options, the first step is to consult professionals. We do not charge any fees to and we offer discrete consultations over the phone, at your office, or in your home. We are always happy to answer all of your questions and there is never any obligation. We also have excellent recommendations to an attorney, tax professionals, and/or any other referral you may need. Short sales are a complex transaction and you may find yourself in even bigger financial trouble if everything isn’t handled properly, which is why it is imperative you have a great team on your side. Also, make sure the person or team that is handling the sale of your home is licensed by the California Association of Realtors. (A license is required under section 10131(a) of the Business & Processions Code.
If you are wondering how much your home is worth and trying to determine if you have enough equity in your property, feel free to contact us today and we can put together a detailed market analysis to determine the market value of your home. We will also put together a “net sheet”, which breaks down all of the fees involved with selling to determine how much equity you have, or, how much you are currently underwater on your home.