What Is a Short Sale?

What Is a Short Sale?

What is a short sale header

If you talk about the real estate industry after the 2008 housing bubble burst, you’ll find that terms like short sale, foreclosure and auction are thrown around with such regularity that it’s commonplace. It’s part of the market now. Whether you are a seller hoping to avoid foreclosure or a buyer wanting a good deal, understanding short sales and how they work is an excellent idea. Use Landmark Home Warranty’s series on short sales to educate yourself or clients.

What Is a Short Sale?

First off, what exactly is a short sale? The name “short sale” is rather confusing. A short sale does not mean the sale of the home will be short. In all actuality, a short sale is generally the longest way to buy a home, with the possible exception of building your own home. No, the name “short sale” refers to the money involved in the sale – meaning the money the home is worth is less than what the seller owes. Therefore, if the home is sold for the amount the home is worth, the seller is short on how much money they have to pay the bank.

A short sale is

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The key point in this sale, though, isn’t just that the seller owes more to the bank than the home is worth. There are many property owners who struggle with that phenomenon – it’s called being underwater on your home. A sale can only be considered a short sale if the bank (or organization that owns the home) agrees to the property being sold for less than what they’re owed. The bank is losing money on this deal so they have to agree to lose that money.

From a Bank’s Point of View: Foreclosure vs. Short Sale

If that makes you say, “What? Why would a bank decide it was OK with losing money on a house?” you’ve stumbled right on the predicament that many banks face when a home has the option of going into foreclosure or going into a short sale. This is the reason why short sales take a long time – all parties that have a say in the home’s sale must be notified, and they all have to agree to sell the home for less money than they are owed. Mortgage lenders have to weigh their options and see which is going to be best financially for their bottom line. This approval may go through multiple committees and levels of the bank. In a simplified way, most committees are trying to decide which option will let them get the most money back from the home. Should they recoup less money from a short sale or put the home back on the market as a foreclosure and get the money that way?

Why a bank would approve

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Most of the time, putting a home back on the market after a foreclosure can take a lot of money. Not only does it take a bit of time to get the home in a condition to sell, it also costs money to market and list the home. Most of the time, banks will get more money from a short sale.

How Does a Home Become a Short Sale?

The most common reason a home becomes a short sale is the owner can no longer make their mortgage payments. They may have lost a job or may be going through some other transition and it’s gotten to the point where they can no longer pay. However, there are times when a short sale has to happen and the sellers didn’t even know. The property value may have drastically decreased when appraised, for example, and suddenly the home won’t sell for as much money as they have left on their loan.

A short sale needs these three things

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When the seller realizes the home has to be sold, and it may be as a short sale, they should go to their bank first. Their bank may be able to help them with some different options for keeping their home. If the home has to be sold, and a short sale is the only way, then they should start looking for a real estate agent well-versed in short sales and marketing it to potential buyers. Talking to the bank is also a good idea, because all of the parties that have a lien on the home must approve the short sale. If the short sale is approved, they must decide how much money they’re willing to take for the home, and they all must agree. All parties must agree that a short sale is a viable option and how much they’re willing to lose on the home before you can go into closing on the house.

Why Would a Short Sale Not Be Approved?

There are a number of reasons, but the bank may see a foreclosure as a more profitable option if:

  • The private mortgage insurance makes up for the costs of foreclosing a property.
  • The home has too many liens and couldn’t pass a title inspection easily.
  • The homeowner has filed for bankruptcy
  • The homeowner has enough funds to pay their mortgage, but is just refusing to pay.

Now that you know what a short sale is, take a look at the next parts of our series. If you’re looking to buy a short sale, read: what you need to know about buying a short sale property. If you’re thinking about selling your home using a short sale, read this.

   Selling a Short Sale Maze Header        Buying a Short Sale Header

Of course, while Landmark provides excellent teaching material for home buyers, owners and sellers, we also provide excellent coverage on your home’s systems and appliances. A home warranty on your house can save you hundreds a year, and can help you maintain and repair your home when it fails from old age. Look at what is covered in your specific area and browse different pricing plans here.

What is a short sale 

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