A short sale is a real estate transaction in which the sale price of the property is not sufficient to pay the loan(s) owed against a property AND the seller is unable to pay the difference. When a homeowner is facing delinquency and possible foreclosure (pre-foreclosure), it is sometimes possible to work with the lender(s) to obtain a sale for less than the amount owed. In a short sale, the lender(s) accepts less than the loan amount owed (“short”) as payment in full
However, not all lender(s) will consider this avenue, and those who do will require extensive documentation and convincing evidence that the seller has suffered some hardship that makes it impossible or extremely impractical for the seller to keep the property. Loss of employment, unusual medical costs, or an extended illness or death of an owner are some examples of hardships. Lenders generally do not consider a decline in property value alone to be a hardship. In essence, a seller must “reverse qualify” and prove that the he/she is financially incapable of re-paying the loan. And the lender must be convinced that the short sale is a faster and less expensive settlement than a foreclosure.
Despite its name, short sales generally take longer to close than re-sales or bank owned transactions. Many banks are overwhelmed right now with short sale requests. And while most do have an understandable review process in place, the shear volume of transactions being processed has bogged the system down. Waiting for the lender to review and approve the short sale package and contract may take up to several months. For this reason, it is very important to be sure to provide the lender with everything they are requesting. Incomplete packages and offers are often passed over or reject. Diligence and patience are key when dealing with a short sale transaction!
Some of the benefits of a short sale for the property owner or seller are:
- The short sale can have less of a negative impact on your credit report than a foreclosure
- The seller avoids eviction because they can live in the property until the short sale closes, allowing them time to make their moving and relocation plan.
- The seller may be eligible to purchase another home sooner than if they were foreclosed on.
However, the seller should also be aware of the downside to a short sale. Short sales involve numerous legal, financial and tax issues. And each case will be different depending on the each sellers unique set of circumstances. The benefits and disadvantages of a short sale may not be the same for different individuals. Therefore, before proceeding with a short sale, a homeowner should obtain legal and financial advice from a qualified real estate attorney, tax accountant and credit counselor.