What is a Short Sale?

We will be discussing Short Sales this week. A number of other planners' clients have come to me recently wanting to know about these, so I thought it would be a good idea to touch upon short sales in this week's post. We are talking about Short Sales with respect to real estate, and not the White Sales that you might see at Sear's, Target, or Wal-Mart. Of course, if you find a good deal on Havana's or Dolphin shorts, go for it. Speedo's, not so much!

The reason a short sale helps you is that your lender does not want your home to go to foreclosure any more than you want that to happen. If property values have dropped, and you can no longer afford to make your payments, then a short sale is one way to avoid foreclosure. Another viable method is a loan modification, but we will talk about this next week.

Short sales basically help you to avoid foreclosure. If you are going to lose your home anyway, a short sale can help you retain some of your dignity in the process, and may even help you to save your credit. Basically, a short sale allows you to sell your home for less than you owe against it, with the lender accepting the sales proceeds as full satisfaction of your loan. If you never paid your loan late, your credit report should show a paid-in-full mortgage with no hits after close of escrow. In short (pun not intended), it will appear as though you simply paid-off your mortgage. If you already are late on your payments, you will still have the mortgage lates, but you will avoid the damage that a foreclosure would cause.

Many people who are in financial trouble would like to sell their homes, but the market values have dropped to the point that they are underwater. This means that the potential sales price is not enough to cover the costs of sale and the liens (mortgages) that exist against the property. By agreeing to a short sale, the lender is allowing you to sell the house at market value without you having to come out-of-pocket to pay-off the balance of the loan.

A short sale does require pre-approval from your lender. You will have to explain to them that you cannot continue making your payments, and that your only solution is to sell your home. The lender will order a Broker's Price Opinion (BPO) to get an idea of the value of your home. From this price, they will deduct their estimated costs of foreclosing and reselling your property. Generally, if you can get an offer that exceeds this amount, they will accept the offer, and let you sell the property.

If you have two loans on your property with two different lenders, you will have to work-out arrangements with both of them. If the same lender holds both loans, this may work to your advantage. In any event, it is illegal for you to profit from the sale of the home, so don't expect this option to put any money into your pocket.

Short sales aren't for everyone, and not everyone will get approved for a short sale. Many lenders will reject offers that seem valid, so you want to ensure that you are working with real estate professionals who have experience in this arena.

If you have run into financial difficulty, and you would like to explore the benefits of a short sale, feel free to contact me, or contact a Realtor in your area.