What is a Short Sale? - Simply defined, a short sale is when the proceeds from the sale of a property are insufficient to cover the existing debt owed on the property, and the owner is unable to pay the funds required to cover the difference at closing. Since the owner is unable to pay the difference, the final approval of sale must come from the lienholders (i.e. lender) because they will be accepting less than what is owed to them. Lenders will often agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage, and by accepting a short sale the lender can avoid a lengthy and costly foreclosure.
A Simplified Example - Jack and Jill Homeowner bought a property four years ago for $300,000 with 100% financing and need to sell. However, the current market value of their home is only $270,000. After an approximate 9% in closing costs for the sale (excise tax, title and escrow fees, commissions, etc), the total proceeds to pay off their loans will only be $245,700 to the lender. In this instance, the proceeds from the purchase will be short by around $60,000, which is what Jack and Jill Homeowner would have to pay the lender at closing. Jack and Jill simply cannot afford that so they have decided to negotiate a short sale with their lenders.
Why is a Short Sale Good for a Seller? - For a homeowner facing foreclosure, it offers a way to prevent the damage a foreclosure will do to their credit score and future borrowing capabilities. For all other homeowners it prevents them from having to pay tens or even hundreds of thousands of dollars to complete the sale of their home.
Why is a Short Sale Good for a Buyer? - Because lenders often do not want to go to foreclosure, they often accept much less than market value for a property. So, more than anything else, a short sale gives buyers an opportunity to purchase homes for less than market value.
Legal Advice - Real Estate Brokers are qualified to assist in certain aspects of the purchase and sale of a short sale, however, generally speaking they are not qualified to provide legal and tax advice. For those considering selling their property as a short sale, it is always recommended that you speak with a real estate attorney and tax attorney / CPA.
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