What Is a Short Sale?
In real estate, a short sale is an offer on a house at an asking price reduced based on the amount of the mortgage left due. Most often, the sale covers a distressed property when someone needs to sell to avoid foreclosure. After this type of sale, the proceeds go to a lender who can choose to forgive the remainder of the mortgage.
What to Know
- Short sales often indicate a distressed property.
- The mortgage lender has to approve the sale in advance.
- Lenders can either forgive the debt or require the payment of a shortfall.
- For a real estate investor, a short sale can be a great opportunity.
- Typically, the financial impact of this type of sale is less severe than foreclosure.
How a Short Sale Works
Usually, a short sale occurs when a homeowner is in a dire financial position. Often, it’s because they missed a mortgage payment once or several times. As such, there’s a fear that they may face foreclosure in the near future.
Generally speaking, there’s a rise in these sales when the housing market falls. A common example is the 2007-2009 financial crisis, which led to plummeting home prices and a steep slow in sales.
For instance, when real estate values drops, a homeowner might sell a house for $150,000 while they still owe $180,000 on their mortgage. That $30,000 difference is the deficiency.
Key Considerations for Homeowners
While a short sale hurts the homeowner’s credit score, it does far less damage than foreclosure. This is because there’s a note on the property sale that marks it as “not paid as agreed” which puts a dent in their credit score.
However, these sales don’t always meet the remaining debt on the mortgage, as shown in the example above. There are two aspects to a mortgage.
- The lien against the property secures the loan to protect the lender, giving them the right to sell the property.
- There’s a promise to repay the loan, which lenders can enforce through a new note or collection of the debt.
In any situation, the lender has to approve the short sale, which can leave the homeowner in a tough situation.
Advantages of a Short Sale
Typically, the homeowner stays in the property during the process. With certain restrictions, they may be able to purchase a new home immediately after.
While a foreclosure has dire consequences for your financial situation, it allows you to walk away from the property. Alternatively, this type of sale requires more legwork but can be more beneficial in the end.
Understanding The Process
Here are the steps involved in the process.
- Consult your mortgage lender: Be sure to cite new circumstances and financial difficulty when you make your case.
- Consult experts: You can work with a lawyer, tax specialist, and a real estate investor or agent to explore your options.
- Set a price: If you’re working with an REI, they will make you an offer. You just need to know whether it works for your situation.
- Gather documentation: The more you can prove your financial situation, the better.
- Find a buyer: For a quick sale, you can work with an investor to get a cash offer.
- Submit a proposal to your lender: Once you have everything in order, submit the proposal.
When you work with professionals, you can make the process easier on yourself. Those with experience can help you navigate the details to ensure your proposal is appealing to your lender.
Final Thoughts
A short-sale property is a tough situation for the homeowner but can be a great opportunity for a real estate investor. Often, these homes are in decent condition, although they may require some repairs and renovations. While the purchase price may be higher than a foreclosed home, the cost of repairs tends to be lower, and the disadvantages are nowhere near as severe.
However, the process can take some time. With an experienced hard money lender on your side, you can find a fair offer and work to negotiate with the bank.
