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What Is A Short Sale?

Written By

Dan Buckley

Updated

Sep 8, 2022

Short Sale Basics

A short sale in real estate is when a homeowner sells their property for less than the mortgage balance owed on the home.

The lender agrees to release the lien on the property and accepts the payoff amount as full payment on the loan.

This can be a viable option for homeowners who are struggling to make their mortgage payments and facing foreclosure.

It is important to note that a short sale will still result in a negative mark on your credit report, although it is not as severe as a foreclosure.

If you are considering a short sale, it is important to consult with a real estate attorney, tax professional, and/or agent familiar with the process to ensure that it is the best option for your situation.

A short sale is a very lengthy process that can often take a year or more to go through.

Short Sale vs. Foreclosure

In terms of consequences for one’s personal credit, a short sale is not as severe as a foreclosure.

A foreclosure will stay on your credit report for 7 years and will have a significant impact on your ability to obtain new financing during that time period.

A short sale is also generally much less expensive than a foreclosure.

If you are facing foreclosure, a short sale may be the best option.

How A Foreclosure Works

When a homeowner fails to make their mortgage payments, the lender will begin the process of foreclosure.

This is a legal process that allows the lender to take back ownership of the property and sell it in order to recoup the balance of the loan.

The foreclosure process can be very lengthy, often taking six months or more.

Once the property is sold at auction, the homeowners are still liable for any deficiency balance owed to the lender.

This means that if the home sells for less than what is owed on the mortgage, the homeowners are still responsible for paying back that difference.

A short sale can often avoid this issue entirely.

How A Short Sale Works

In a short sale, the homeowners sell the property for less than what is owed on the mortgage.

The proceeds from the sale are used to pay off the balance of the loan, and the lender agrees to release the lien on the property.

This allows the homeowners to walk away from the property without any further financial obligation.

It is important to note that in order for a short sale to be approved, all parties must agree to the terms of the sale.

This includes the homeowners, their lender, and any other lien holders on the property.

If you are considering a short sale, it is important to consult with an experienced real estate agent or attorney who can assist you in the process.

The short sale process can be very lengthy, often taking a year or more to complete.

During this time, the homeowners are still responsible for making their mortgage payments.

If you are unable to make your mortgage payments, a short sale may not be the best option for you.

Short Sale vs Foreclosure

Alternatives To A Short Sale

If you are struggling to make your mortgage payments, there are a number of alternatives that you may want to consider before pursuing a short sale.

These include:

Refinancing your home loan
Obtaining a loan modification
Filing for bankruptcy
Selling your home through a traditional sale

Each of these options has its own set of pros and cons, and it is important to consult with an experienced real estate agent or attorney to know your options and the various aspects of them before making a decision.

Short Sale Process

A short sale follows the following process:

Get the Lender to Agree to a Short Sale

The first step in a short sale is to get the lender to agree to the terms of the sale.

This can be a very difficult process, as the lender must be convinced that it is in their best interest to approve the sale.

In order to do this, you will need to provide the lender with a hardship letter explaining your situation and why you are unable to make your mortgage payments.

You will also need to provide documentation of your income, assets, and liabilities.

Once the lender agrees to the short sale, they will issue a pre-approval letter outlining the terms of the sale.

This letter will need to be included in any contract that is signed with a potential buyer.

Consult Professionals

At this point, it is a good idea to consult a tax professional, attorney, and real estate agent. These professionals can be expensive, but trying to go about it yourself can cost you even more.

The agent will list your home and help you find a buyer.

The attorney will make sure that all of the paperwork is in order and that your rights are protected.

The tax professional can advise you on any tax implications of the sale.

Set a Price for the Home or Property

The next step is to set a price for your home or property.

This can be done with the help of a real estate agent, who will do a comparative market analysis to determine the fair market value of your home.

It is important to note that the price you set should be below the amount owed on the mortgage.

If it is not, then the sale will not be considered a short sale and you may still be liable for any deficiency balance.

Find a Buyer for the Property

The next step is to find a buyer for the property.

It is important to note that the sale price of the property must be approved by the lender in order for the sale to go through.

If you are working with a real estate agent, they will be able to help you market your home and find a qualified buyer.

Once an offer is made, it will need to be submitted to the lender for approval.

Sign a Purchase Agreement with the Buyer

Once you have found a buyer who is willing to meet the terms of the sale, you will need to sign a purchase agreement.

This is a legally binding contract that outlines the terms of the sale, including the price, closing date, and any other contingencies.

It is important to note that the purchase agreement is not final until it is approved by the lender.

The buyer may also be asked to sign a promissory note agreeing to pay any deficiency balance on the mortgage.

This is an important decision, and you should consult with an experienced attorney or real estate agent before signing anything.

The Closing Process

Once the purchase agreement is approved by the lender, the closing process can begin.

This is when the sale of the property is finalized and the deed is transferred to the buyer.

At this point, you will need to vacate the property and turn over all keys to the new owner.

You will also need to sign a release of liability, which absolves you of any responsibility for the mortgage.

Funds Are Distributed

Once the closing process is complete, you will need to get paid for your property.

The proceeds from the sale will first go to the lender to pay off the mortgage balance.

Any remaining funds will go to you.

It is important to note that you may not receive any money from the sale, as the lender may be owed more than the sale price of the property.

You should also be aware that you may be responsible for paying taxes on any money that you receive from the sale.

A short sale can be a complicated and stressful process, but it can also be an excellent way to avoid foreclosure and get out from under an upside-down mortgage.

Short Sale Strategies for Investors and Buyers

If you’re an investor or buyer looking for a good deal on a property, short sales can be a great option.

Since the lender is typically owed more than the sale price of the property, they are often willing to accept a lower offer in order to avoid having to foreclose on the home.

This can lead to some great deals for investors and buyers.

Here are a few tips to help you get started and how to find short sales in the first place:

1. Look for properties that have been on the market for a while. Find a viable short sale candidate through the help of a real estate agent.

2. Contact the listing agent to see if the owner is interested in doing a short sale.

3. Make an offer that is below the amount owed on the mortgage.

4. Be prepared to be flexible on the price and closing date.

5. Have a loan pre-approval in hand to make the offer more attractive to the lender.

6. Be aware that the process can take several months to complete.

7. Be prepared to walk away if the lender is not willing to negotiate.

A short sale can be a great way to get a good deal on a property, but it’s important to be prepared for the process.

If you’re patient and work with a good real estate agent, you should be able to find a great property at a great price.

Pros and Cons of a Short Sale

As with any major financial decision, there are pros and cons to doing a short sale.

It’s important to understand both before making a decision.

Pros:

Avoid foreclosure
Get out from under an upside-down mortgage
Walk away from the property without owing any money
Damage to credit is not as bad as foreclosure
Can be a good way to find a deal on a property for a buyer or investor

Cons:

Process can be lengthy and complicated
Seller may not receive any money from the sale
Still owe taxes on forgiven debt
Damage to credit score

FAQs – Short Sale

Is buying a short sale property a good idea?

It depends. Buying a short sale property can be a great way to get a good deal on a property, but it’s important to be prepared for the process.

The process can be lengthy and complicated, and you may not receive any money from the sale. You will also still owe taxes on forgiven debt.

What is the difference between a short sale and foreclosure?

A short sale is when the lender agrees to accept a payoff of less than the full amount owed on the mortgage in order to avoid having to foreclose on the home.

A foreclosure is when the lender forces the sale of the property in order to recoup the balance of the mortgage.

Foreclosures generally have a more negative impact on your credit score than short sales.

What is the difference between a short sale and a deed in lieu of foreclosure?

A deed in lieu of foreclosure is when the homeowner signs the deed to the property over to the lender in order to avoid foreclosure.

A short sale is when the lender agrees to accept a payoff of less than the full amount owed on the mortgage in order to avoid having to foreclose on the home.

A deed in lieu of foreclosure will generally have a more negative impact on your credit score than a short sale.

What are the tax implications of a short sale?

You may be responsible for paying taxes on any money that you receive from the sale.

The IRS may treat the forgiven debt as income, so you may be responsible for paying taxes on that amount.

You should consult with a tax advisor to determine the specific tax implications of a short sale.

What is a pre-foreclosure?

A pre-foreclosure is when the homeowner has fallen behind on their mortgage payments and the lender has initiated the foreclosure process.

What is a pre-foreclosure short sale?

A pre-foreclosure short sale is when the lender agrees to accept a payoff of less than the full amount owed on the mortgage in order to avoid having to foreclose on the home.

The property is typically sold by the homeowner before the foreclosure process is completed.

A pre-foreclosure short sale will generally have a less negative impact on your credit score than a foreclosure.

How can I find out if a property is a short sale?

You can try searching online for “short sale” or “pre-foreclosure” properties.

You can also ask your real estate agent if they know of any properties that are in the process of a short sale.

What are the risks of buying a short sale property?

The main risk of buying a short sale property is that the process can be long and paperwork-intensive. A lender may not be willing to do it. Additionally, the property may be in poor condition due to the homeowner’s financial situation.

How can I make an offer on a short sale property?

You will need to work with a real estate agent to make an offer on a short sale property. The agent will help you navigate the offers process and negotiate with the lender on your behalf.

What are the chances of my offer being accepted on a short sale property?

It depends. The lender will need to approve the short sale, so they will be looking for offers that are close to the full amount owed on the mortgage.

If your offer is significantly lower than the mortgage balance, it is less likely to be accepted.

How long does a short sale take?

The process can take several months, and sometimes even up to a year.

I’m interested in buying a short sale property. How do I get started?

You will need to work with a real estate agent who has experience with short sales.

They will be able to help you navigate the process and negotiate with the lender on your behalf.

How often do banks accept short sale offers?

It depends on the bank. Some banks are more likely to accept short sale offers than others.

What is a BPO?

A BPO is a Broker Price Opinion. It is an estimate of the value of a property, typically used by lenders in the short sale process.

Do I need an attorney for a short sale?

An attorney is not required for a short sale, but you may want to consult with one to discuss the legal implications of the process.

What is a short sale restriction?

A short sale restriction is when the lender agrees to accept a payoff of less than the full amount owed on the mortgage, but places a restriction on the property that prevents the homeowner from selling it for a certain period of time.

What is a deficiency judgment?

A deficiency judgment is when the court orders the homeowner to pay the difference between the balance of the mortgage and the amount of the short sale.

What are some tips for negotiating a short sale?

Some tips for negotiating a short sale include: being prepared to walk away from the deal if the lender does not agree to your terms, being willing to negotiate on price, and offering a higher down payment.

Consulting with an attorney or real estate agent who has experience with short sales will help you navigate the process.

How long does a short sale stay on your credit report?

A short sale will stay on your credit report for seven years.

What is a deed in lieu of foreclosure?

A deed in lieu of foreclosure is when the homeowner signs over the deed to the property to the lender in order to avoid having to go through the foreclosure process.

What are some advantages of a deed in lieu of foreclosure?

Some advantages of a deed in lieu of foreclosure include: avoiding the negative impact of a foreclosure on your credit score, and being able to walk away from the property without owing any money.

What are some disadvantages of a deed in lieu of foreclosure?

Some disadvantages of a deed in lieu of foreclosure include: it may be difficult to qualify for a deed in lieu of foreclosure, and the property may still be subject to a deficiency judgment.

Summary – Short Sale

A short sale is when the homeowner sells the property for less than the balance of the mortgage and the lender agrees to accept the payoff. The process can take several months, and sometimes even up to a year.