A Short Sale is when the lender will allow you to sell the property for less than what you owe to them and whatever the difference is, the lender will release you of the financial obligation. Short Sales are not always welcomed by lenders, especially if there is a substantial amount of equity in the property. In the event that the lender determines that there is equity in the property or the offer from the potential buyer is too low, the lender may either reject the Short Sale offer, counter-offer, or proceed to foreclosure.
Lenders are aware that there may be investors attempting to take advantage of the homeowner’s position by offering low-ball contracts. It is important to note that a homeowner cannot enter into a Short Sale Contract unless the contract has the lender’s approval. The reason why the lender must approve the Short Sale is because only they can make the decision to accept a lower amount than what is owed under the Note.
Some lenders are starting to allow the sale of the home for lesser amounts than obligated, and they have the homeowner execute a Promissory Note for the balance. This is not considered a Short Sale. In this case, the lender has only agreed to release the lien in order to allow the Contract Purchase to proceed to Closing. Eventually, the lender will seek to collect the deficiency amount from the homeowner by having them sign a Promissory Note for the difference. Consult an attorney before you agree to this arrangement because a Short Sale may not be in your best interest.
In a true Short Sale, the lender will either hire a Real Estate Agent to give them a Brokers Price Opinion (BPO) or they may hire an appraiser to determine the value of the property. The reason for this is so that the lender will make the best decision in terms of whether to accept, reject, or counter the Short Sale.
Short Sales can take up to 6 months to be approved and can be a very stressful event for the seller. Even after a contract has been submitted to the lender, there is no guarantee that the lender will accept the offer. In the interim, the buyers are almost always ready to close within 60 days. Unfortunately, lenders are not concerned with the buyer’s request to close until the offer has been fully evaluated. During the Short Sale process, it is not uncommon to have buyer pull out of the contract because of the amount of time that it takes to close.
If you find yourself in need of a Real Estate Agent to assist with a Short Sale, be sure to select an agent that understands the Short Sale process. Not all Real Estate Agents are aware of the delays and nuances associated with Short Sales.
Finally, talk with an accountant to discuss the financial consequences that may arise as a result of the Short Sale option.
Example of a Short Sale: You own a house that you can no longer afford. You owe $400,000.00 to XYZ Lending.You hire a Real Estate Agent to sell your property. Your agent advises you that homes in your neighborhood are now selling for $350,000.00. You do not have $50,000.00 to pay to the lender if your house sells for $350,000.00, but you still want to sell the house. You have the agent drop the asking price to $350,000.00 and you get an offer. You want to accept it, but you cannot because you will owe the bank $50,000.00. You call the lender and ask that it accept $350,000.00 and forgive the rest. The lender will conduct its own due diligence and decide whether or not to accept the contract and determine if you will have to pay back the $50,000.00. If the lender accepts the contract, it has accepted a short sale.
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