What is a Short Sale?

What is a Short Sale?

Short Sales are a very niche area of real estate. It is important that the homeowner, agent, and buyer of the property understand what a short sale is so let us discuss basic aspects and compare this option to other alternatives.

A short sale occurs when a financially distressed homeowner sells their property for less than the amount due on the mortgage. To be more specific, the purchase price in a short sale is less than the amount required to pay off the liens, such as mortgage(s), judgements, taxes, HOA or condominium association fees, assessments, as well as closing costs. The buyer of the property is a third party (not the bank), and all proceeds from the sale go to the lender. The lender either forgives the difference or gets a deficiency judgment against the borrower requiring them to pay the lender all or part of the difference between the sale price and the original value of the mortgage. In most states, the difference is forgiven in a short sale.

Key Takeaways

• A short sale in real estate is one in which a house is sold for a price that is less than the amount still owed on the mortgage.
• It is up to the mortgage lender to approve a short sale.
• Sometimes the difference between the sale price and the mortgage amount is forgiven by the lender, but not always.
• For the seller, the financial consequences of a short sale are less severe than those of a foreclosure.
• For the buyer, it is important to calculate costs and be sure that there is room for profit when the house is resold.

Short Sale Vs. Foreclosure

Short sales and foreclosures are two routes available to homeowners who are behind on their mortgage payments, who have a home that is underwater, or both. In both cases, the owner is forced to part with the home, but the timeline and consequences are different.

A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against the delinquent borrower to force the sale of a home, hoping to make good on its initial investment of the mortgage. Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. If the lender thinks it can get more money from foreclosing on your home than from allowing a short sale, it may not allow one and push for auction. Foreclosed homes are usually auctioned off at a trustee sale, where buyers bid on homes in a public process.

A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately. Depending on the circumstances, homeowners who experience foreclosure can expect to wait up to seven years to purchase another home. A foreclosure is kept on a person’s credit report for seven years.

A foreclosure essentially lets you walk away from your home with grave consequences for your financial future, such as having to declare bankruptcy and destroying your credit. While completing a short sale is labor-intensive, the payoff for the extra work involved in a short sale may be worth it.

Short Sale Benefits:

Waiver of deficiency Judgment

If a bank forecloses on your home and the proceeds of the judicial sale are not sufficient to repay the full loan balance, a deficiency will result. In certain states including New York, the lender may have the right to sue you for the deficiency, plus interest and legal costs. If the lender obtains a deficiency judgment, it may take further steps to collect the deficiency from you by seizing your bank accounts, garnishing your wages, and placing liens if any other properties are owned. With a short sale, however, the lender may waive the deficiency judgment.

Settlement of Personal Debt

In order to sell property in most states, NY especially, you are required to convey free and clear title. That means any personal liens such as medical collections, credit card debt, IRS warrants, personal collections that have been collateralized by the property will need to be satisfied. Typically, in a short sale, the seller does not have the money to pay off these debts. Net Short Sale will help the seller obtain settlements on these accounts and negotiate them into the purchase price. This process eliminates any further obligations. You can really be debt free!

Monetary Incentive

Certain mortgage servicers offer relocation incentives. This amount varies depending on the investor of your loan (FHA, Fannie Mae, private trust etc.) In the current market Lenders are recognizing that short sales are no longer better for their bottom line because they can get more $ for the property at auction. However, some servicers still prefer the seller to short sale because it minimizes the tax, maintenance, legal and other carrying costs that accrue to lenders. If the bank offers any incentive, we always try to get the max amount possible for our clients.

No out-of-pocket expense

As opposed to a typical retail sale, where all seller closing costs are paid by the homeowner, participating in a short sale allows for those expenses to be absorbed by the lender. These costs include realtor commissions, attorney fees, New York transfer taxes, title charges and open taxes. On a case-by-case basis, a portion of open water, junior liens, ECB’s, IRS, personal judgments, and certain violations can also be included. 

Take control of Your Life

Foreclosure is a time-consuming legal process accompanied by a lengthy period of uncertainty. Losing a home in such an extended manner can cause anxiety, stress, and depression for you, and your family. A short sale lets you take charge of your life. When you choose to do a short sale, you are making the decision to be responsible and regain control. You can arrange your moving plans in advance, like a traditional home seller would, and leave your home gracefully on your own terms.

Summary

Foreclosure – Grave consquences, up to 7 years before you can buy a home and most damaging to your credit score.

Short Sale – Permanent relief, you are free of mortgage debt and can buy a home in as little as 2 yrs. Least damaging to your credit score.