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What Exactly is a Short Sale?

Learn what defines the real estate technique.

I continue to meet both buyers and sellers that ask me the question, “What exactly is a short sale?” Over the last 14 months that I have contributed to Patch, I have written a variety of article on short sales. Seeing that short sales are probably going to continue to be a major factor in the market, it can’t hurt to discuss it again.

So, “What is a short sale?” By definition a short sale is when a seller of a house is selling it for less than what they owe the bank. For example, Mr. and Mrs. Smith buy a home in 2005 for $300,000. When they bought they put 5 percent  down for a mortgage of $285,000. Since then the payoff amount has gone down as the Smith’s make payments and as of 2012 the amount they owe on the loan is $275,000.

Now, due to some type of hardship, the Smiths need to sell. An example of a hardship could be anything from job loss, income reduction, job transfer, divorce, etc.  If the Smith’s decide that they must sell, today’s market dictates that the value of their home is now $225,000. In this example they would be $50,000 SHORT on paying the bank the balance owed. Add another 10 percent in selling costs (Realtor fees and closing costs  and the true net on the deal is $202,500. Now the shortage is $72,500.

It is very important to understand the contractual side of a short sale. When a contract is written on a short sale, the binding contract is between the buyer and the seller.  Added to the contract is a contingency that the bank accepts the short sale. This way, if the bank comes back with a negative answer, both the buyer and seller are free to walk away from the deal. This contingency is critical to protect the seller  and allows the buyer to walk, keeping their earnest money.

Once the short sale package is sent to the bank for review, the bank assumes most, if not all of the costs, that are written into the contract as “seller contributions.”  At the end of the day, the bank has to determine if receiving a net sum of $202,500 (number from example above) is acceptable.  If YES, then the short sale proceeds to closing. If they determine that $202,500 is too low, the bank may counter back with an acceptable price. If the buyer does not agree to pay that price, then more than likely the home will ultimately end up in foreclosure in the not too distant future.

Next week I will go into detail as to what the banks want in the short sale package I mentioned earlier.  If you are struggling to keep up with your mortgage, consider a short sale vs. foreclosure.  Times are tough but there are options. If you have any questions please email me or give me a call. 

This article originally appeared on Suwanee Patch.

Kim Roberto March 11, 2012 at 04:00 PM
Since we are looking at a short sale, this was quite informative. However, I have one question. Can the buyer offer LESS than what the seller is asking, or is that a set price? Say the buyer is asking $150,000. We offer $125,000 and put down earnest money. If the seller and/or bank rejects that offer do we get our earnest money back?
Sharon Swanepoel March 11, 2012 at 09:55 PM
Kim, I've sent Scott an email asking for an answer to your question.
Scott Lacy March 13, 2012 at 01:37 PM
Kim, The buyer can make an offer of any amount that you wish. Keep in mind that the bank has guidelines that they must follow. They will do their own evaluation of the "market value" of the property. Once that market value is established they can only accept a certain percentage of that value. The banks net includes the price, less any other costs, such as closing costs and realtor commissions. If the seller accepts your offer, it will then be contingent on the bank saying YES to that number. In your example, tha bank may come back and say the lowest they will accept is $135,000. At that point you must decide if that works for you. In dealing with a short sale I highly recommend having a Realtor, to guide and advise you. If you have any questions you can email me at scottlacy@kw.com or call me on my cell at 770-722-5129
Kim Roberto March 15, 2012 at 08:50 PM
Thanks for the response Scott (here and email). I will definately be in touch should we decide to make an offer. We had a realtor show us the house, but she wasn't very pro-active or informative.

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