What is a Short Sale?
People often ask us, “what is a short sale?” After all, the words and phrases used so frequently by the media today (ie “short sales,” “foreclosures,” “pre-foreclosure,” etc.) can be quite confusing.
First, let’s start with the technical answer. According to Wikipedia, a short sale is defined as the following:
“A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. Both often result in a negative credit report against the property owner.
Real estate industry data indicate that there were 2.2 million short sales in the United States during the period of the subprime mortgage crisis up to mid-2013.”
Put simply, a short sale is when a property owner asks their lender to accept less than the amount owed on the loan for the property. This happens when the property can not be sold for enough to cover the loan balance, and the borrower is “under water.” If the lender approves the request, the seller can sell the property and repay as much of the loan as the proceeds will cover.
You may be wondering, “why the heck would the lender accept less than the balance owed?!” This is a great question, with a few potential answers:
- If the lender doesn’t accept a short sale, it may ultimately have to foreclose on the property, which is an expensive, time-consuming and difficult process for the lender.
- If the lender has collected a great deal of interest income on the loan over the years, it may feel it can afford to lose a little on the loan amount.
- If the lender is doubtful that the owner will likely ever be able to repay the loan, it may deem it more advantageous to simply “cut its losses” in the short term.