A short sale happens when a homeowner agrees to sell their property for less than the amount owed on a mortgage loan. This sale cannot happen without the lender’s approval.
The usual result is that the seller will continue to owe money to the lender after the sale. However, it’s also considered a viable alternative to foreclosure, with the seller’s credit remaining intact.
Usually, a short sale comes into consideration when the seller falls behind in their mortgage payments, often by several months. Rather than let the situation continue to worsen, the bank becomes willing to sell the property at a loss. Some money is better than no money, and the lender may be able to recoup at least some of the original costs.
A reason to push for a short sale when necessary: nobody wants foreclosure; not the seller nor the lender. A foreclosure becomes costly to the lender, who must pay all the associated costs, which may include eviction. The lender may also be responsible for any repairs and maintenance that must be performed on the property before it can be ready for resale.
The bank has the option of foreclosure instead of a short sale, but the idea of a vacant, delinquent, foreclosed property appeals to no one.
A short sale may be where the buyer benefits too. The buyer may get a great deal on a terrific property that would otherwise be out of their ballpark. The bank may offer the property at more favorable terms in order to attract more buyers. Low interest rates and other terms in favor of the buyer may get the property sold faster, and off the lender’s back.
Of course, the homeowner may not always be so cooperative when it comes to settling on a short sale. A resentful homeowner may cause damage and acts of vandalism on the property.
In most cases, a short sale may seem like the most sensible option to a desperate homeowner, preventing damage to their credit and presenting a quicker recovery so the owner could move on and put the unfortunate episode behind them.
To get the best broker price opinion (BPO) for a short sale, The Balance suggests the following:
- Unlike a typical appraisal, avoid looking at the location or taking amenities/upgrades into consideration.
- Look for similar square footage and age within a half-mile of the property.
- Average the sold sales by adding them together and dividing by the number of homes sold.
- Use that average per square foot cost multiplied by the square footage of the property in question.
However, the short sale process may not be as easy as it seems. The Balance lists seven disadvantages:
- Short sales can take as long as a year to be finalized.
- Multiple liens on the property may complicate the process. All the lien holders may have to approve the short sale.
- The lender may want to negotiate or counter the short sale offer, which may extend the time it takes to get it approved.
- The short sale property is usually sold “as is,” but a buyer may want to hire a property inspector to take a deeper dive as to what may need improving or repairing.
- A short sale process may cause the buyer to miss other and less complicated buying opportunities.
- The seller may not be approved for a short sale. The buyer must make sure that a short sale has been approved by a lender.
- Short sales usually require all cash or larger down payments. Buyers with cash are considered less risky.
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