What Exactly is a Short Sale?

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.