What is a Short Sale?
BY definition a short sale is the sale of real estate in which the proceeds of a sale will fall short of the balance owed on the seller’s mortgage loan. This most often occurs when the property owner can no longer make payments and cannot sell the property for the amount owed due to a fall in the property value. The lender and the property owner may agree that it is a better path to sell at a moderate loss rather than proceed through the costly and lengthy process of foreclosure. The property owner may or may not be responsible to the lender for the difference between what is owed on the mortgage and the proceeds of the short sale which is called the ” deficiency”. Many factors are considered to determine each and every short sale outcome. Below is a brief outline of a short sale from both the Buyer and Seller sides of a short sale transaction.
How Does it Work? From a Buyer’s Perspective
Each short sale is unique, however there are some common elements.
- The property is listed for sale at a price that is determined to be one that will attract buyers and might be acceptable to the lender. (Note: Low prices that seem to good to be true probably are. Unless specifically stated as pre-negotiated these low prices have not been agreed to by the lender).
- Once a contract to purchase has been mutually agreed upon by the property owner and a buyer, the contract is then forwarded to the mortgage lender for approval.
- Each lender may have a different process and there may be more than one loan on the property and multiple lenders to coordinate and approve the short sale. Short sales with only one lender are much easier to negotiate and close.
- This part of the process differs from lender to lender. A reasonable expectation would be a wait of 45-90 days. During this waiting time the lender has ordered BPOs ( Broker Price Opinions ) and appraisals of the property value.
- If the property is priced well below market value, expect a counteroffer from the lender at market value. Lenders may or may not be willing to contribute to buyer’s closing costs. Lenders who are willing to pay closing costs many times limit the contribution to 3% of selling price.
- Buyers should have full understanding of the risks and use caution when entering in to a short sale contract. Many times properties are not being maintained and can suffer deterioration or damages during the negotiation period. There is no guarantee that the lender will agree to a short sale and many buyers are disappointed after a long wait.
- On the positive side and with some patience, a short sale can prove to be beneficial for both buyer, seller and lender at a fair current market price.
Short Sale Seller Advisory
- Again, each and every home in unique and every seller is unique. Selling your home by short sale is not a one size fits all process.
- The Washington State Department of Financial Institutions has put together a Short Sale Seller Advisory which we encourage you to review at: http://www.dfi.wa.gov/consumers/pdf/short-sale-advisory.pdf
- Always obtain legal advice before and at key steps during the short sale process. There are now some flat rate short sale legal firms locally that offer an initial consultation to determine if a short sale is feasible for you. These firms generally offer a flat rate to administer the short sale if it is determined that moving forward is in the best interest of the seller.