What is a Short Sale? Short Sales Defined

What is a Short Sale?

There is much confusion over the meaning of the term “short sale”.  Whether you’re considering buying or selling real estate, it is an important subject.  When I research our market in South Florida for a market analysis for a seller or when I search the MLS listings for a buyer, often the majority of the properties are short sales.

There are many misconceptions about what the term “short sale” means. Many people think that a short sale is any sale that is priced below what the Seller paid or below what is owed to the bank. While both of those conditions are often true, they are not what determine a short sale as defined by those of us in the real estate business.

Short Sale: Definition

A true short sale occurs when a Lender agrees to accept a price less than what is owed on a mortgage. The Seller is still the person that bought the property from the Lender, but they don’t have the financial resources to close the sale without the Lender’s cooperation. The Lender must be willing to accept a loss. A short sale must close before the Lender forecloses on the property. Sellers are required by the Lender to prove financial hardship and inability to meet their mortgage commitment.

Short Sale Information for Sellers

Why would a Seller want a Short Sale vs. a Foreclosure?

It is a sad fact that the majority of people going into foreclosure have just given up, and they never realized that they may have a much better option. If the homeowner is assisted by a Realtor who understands the short sale process, there is a strong chance that foreclosure can be avoided. Many homeowners don’t think they can afford to sell. This is a tragic assumption, because most Realtors only charge a commission if a sale is made, and the Lender pays the commission!

A foreclosure is much more damaging to a person’s credit rating than a short sale. A short sale is a settled account, where a foreclosure is a default. Many job applications and security clearances are challenged by a foreclosure. Foreclosures remain on a credit history for at least 7 to 10 years.  A Seller can bring their credit rating back up from a short sale in 2 to 3 years or less.

Short sales are much more work for the Realtors involved, as well as the title company handling the transaction. I cannot emphasize enough how important it is for the Seller to be supported by right team. From my standpoint, it is well worth the extra work, knowing that it can make such a huge difference for the financial outlook of the Seller.

If you're wondering if a short sale may be the best option for you, I welcome you to contact me for a confidential consultation.

Short Sale, Foreclosure, and Distressed Property Information for Buyers

Which is easier for a Buyer: Short Sale, Foreclosure, or Motivated Conventional Sellers?

There is no way around it, short sales are less certain and more likely to take longer than other sales. Long delays in responses from the Lender are common, for initial offers and subsequent negotiation.  Many Buyers and Realtors prefer to stay away from short sales for this reason. Any Buyer considering a short sale should expect delays in the negotiation and often the closing, along with a lot of extra paperwork. This is not to say that a Buyer should turn these listings away, as long as they have plenty of patience.

Foreclosures are typically more straightforward than short sales, because the Buyer is dealing directly with the Seller, who is usually the Lender. There is inevitably more paperwork than in a conventional sale, but usually not as much as in a short sale. There are often delays in response time, but again, rarely as long as in a short sale. Lenders are not in the business of owning property, and do not want to carry the expenses any longer than necessary.  They will often price their inventory, known as REOs (Real Estate Owned), at prices that are aggressively lower than comparable properties on the market.

Motivated Conventional Sellers are owners who feel they have to sell, and have enough equity or personal capital to sell their property at an aggressive price. Of course, many Sellers who are hoping for a short sale are motivated, and so are Lenders, but we’re talking about conventional sales here, where Lenders are not involved on the Seller side. Life events usually drive the motivation, including job relocation, health issues, estate sales, and divorce. These Sellers usually respond quickly, the sales normally require standard contracts, and closings can occur in a normal timeline.

Question: “We offered full price for a short sale, and the offer was refused! How can this happen?”

All short sales are subject to the approval of the Lender, who may not approve the amount they will receive even if a Buyer offers the full asking price in the listing. Because Sellers are motivated to sell before the Lender forecloses, they reduce their asking price until the property gets shown and hopefully, offers come in. Realtors who are knowledgeable in the short sale process offer very valuable assistance in the pricing strategy that will be acceptable to the Lender and that will bring potential Buyers in the least time.

Often, Realtors will seek short sale properties for their Buyers that have already had an offer refused, so they can find out what amount was acceptable to the Lender if the Lender made a counteroffer. 

If you're seeking assistance with finding and negotiating a great deal on a short sale, foreclosure, or other distressed property, I welcome you to contact me for a free consultation.

Copyright© 2008 by Scott A. Field. All rights reserved. No reproduction is permitted without the author’s express permission.