As housing prices hit a Zenith in 2006 then not only fell back to earth but a few hundred feet below the surface, the term “short sale” began to enter the lexicon of real estate agents everywhere. The act of a short sale has been around for a long time in various forms but the transaction never really took short sales for investorshold as a universally acceptable way to transfer real estate from seller to a buyer. As long as the bank agrees, of course.

 

Traditionally, a buyer makes an offer for $150,000 on a home and there is a $100,000 mortgage outstanding. The offer is accepted, the mortgage is paid off and the seller walks away with $50,000 less closing expenses. Yet with a short sale, the world is turned upside down. In this example, let’s reverse the numbers. There is a $150,000 mortgage outstanding and the property is only worth $100,000. In order for this transaction to proceed, the seller would have to come to the closing table with about $50,000 to make up for the mortgage shortfall.

But why would a bank accept something less than what is owed? Because there’s the possibility of foreclosing on the home with no payment on the mortgage at all with the property being severely underwater. The bank might eventually sell the home for $100,000 after the foreclosure but lose a significant amount in legal fees and lost interest. A short sale gets rid of the non-performing asset off the banks’ books while at least recovering something.

For a short sale to work, the owner must petition the bank and provide reasons why a short sale is a true win-win. The owner will document the difficult financial situation, provide a sales contract for the requested short sale amount as well as provide an appraisal or comparative market analysis justifying the lower price. Once the bank accepts the reduced amount as paid in full, the owner is released from the obligation and the property is sold at current market levels.

A short sale takes a big longer than a traditional transaction as the bank must evaluate the short sale request so expect to add another month to the typical closing cycle but that cycle has shortened considerably over the past couple of years as banks become more experienced when approving the request.