What's a Short Sale?
A short sale generally occurs when the seller's net proceeds after payment of customary closing costs are insufficient to pay the outstanding mortgage in full at closing. In other words, a seller is "short" when there would not be enough money left to pay off the mortgage after a sale.
When a buyer gets a loan to buy a home there are two instruments involved. One is the "note," which says the homeowner has borrowed money and must repay it through monthly payments - and pay off the balance out of the proceeds when the property is sold. The other instrument is the "mortgage," which says that the home will be the collateral for the loan. The mortgage is the "Pay you stay, don't you won't" document. The lender places a lien on the home; it cannot be sold until the lien is satisfied and the loan is paid off. If the homeowner can't fulfill the obligation of repayment the lender will take the collateral - the home - instead.
Recent history has seen buyers financing all, or almost all, of their home purchase, followed by still more borrowing as the home's value increased. This has now combined with payment increases for those with variable rate loans as well as current property value declines to create a perfect storm - homeowners who can't afford to continue making monthly payments and at the same time can't sell the home at a price that will produce enough money to repay the lender.
Homes offered for "short sale" are still owned by the homeowner. The lender has not taken the home, although that process is sometimes underway. The seller is trying to avoid just that. After the seller and a buyer enter into an agreement for the sale of the home the lender must be convinced to take what's available as satisfaction of their lien and to give up the remaining balance. This "mitigation" process will hinge on the lender deciding whether they would be better off taking the proposed loss or taking the home, with all the associated costs, and selling it themselves. This is a lengthy and complicated process and requires the assistance of a professional. In other words, whether you're a buyer or a seller - Don't try this at home!
For more information on buying or selling short, please contact me anytime. You can see an example of a currently available "short sale" here.
