What Does a Real Estate Short Sale Mean?
Many homeowners, investors and buyers have heard the phrase “short sale” in the real estate world, but not all know what it means. A real estate short sale can be a confusing and difficult process. In this article, we’ll unpack what a short sale is, explain how it works as well as its benefits and challenges, and compare it to foreclosure.
What Is a Short Sale in Real Estate?
Real Estate short sale: The term “short” refers to a homeowner who owes more on their loan than the property is worth, and are selling it for less than owed. This situation usually arises when the homeowner is financially unable to continue making their mortgage payments, and where the property’s market value is less than what they owe to the lender. The borrower requests the lender’s permission for the sale of the property for less than owed and the lender agrees to accept proceeds from that sale in full satisfaction of the debt.
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How Does a Short Sale Work?
Sellers Request: The homeowner (or seller) has to request the lender for Lenexa short sale. This often requires the applicant to demonstrate financial difficulty, for example evidence of unemployment, medical costs or a fall in property value.
Lender Review: Lender reviews the homeowner’s situation and assesses his current property value, financial distress and other factors.
Approval and Negotiation: The property may be marketed by the seller after the lender has approved their request for sale. Prospective buyers make offers, and a lender has to approve the final sale price.
Sale and Redemption: If the bid is accepted, the property is sold off and returned to the lender. If, on the other hand, the sales price is less than what you owe your mortgage lender might forgive — that means they would not try to collect it from you but sometimes will go after homeowners for a deficiency judgment – what remains, at least on their side of the equation.
Short Sale vs. Foreclosure: What’s the Difference?
While both short sale and foreclosure mean that the homeowner cannot afford to pay the mortgage payments, the two processes are quite different:
Short Sale: The borrower still owns the home and cooperates with their lender to sell the property for less than what is owed. The homeowner may also have some room to negotiate debt forgiveness.
Foreclosure: The lender seeks to repossess the property when the homeowner stops making payments. When the bank completes the foreclosure, then the homeowner might need to relocate, and some lenders sell the home at a public auction. Even after a foreclosure, the homeowner could still be responsible for the balance remaining on that loan.
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Real Estate Short Sale Advantages and Disadvantages
Pros:
Prevent Foreclosure: In a short sale, sellers are able to prevent the damaging effect of foreclosure on their credit history.
In some situations the lender authorizes a borrower to complete a short sale and agrees not to try to collect on the remaining balance due, which means the seller is required to report this forgiven amount as income.
Less Credit Damage: Homeowners could see less damage to their credit score with a short sale vs foreclosure.
Cons:
Time Consuming: The short sale process may last several months and creates uncertainty for the seller.
Lender’s Approval: Less commonly, the lender needs to approve the sale and this can take a very long time and possibly result in having all offers refused.
Potential Tax Implications: Cancelled debt can be treated as taxable income, in certain circumstances.
Benefits for Buyers
A short sale can also create opportunities for homebuyers searching for a bargain on a property. Most of the time, short sale homes are priced less than what they should be on the market since it means that a homeowner is in financial trouble. But buyers need to know that short sales usually mean waiting, as they have to be approved by the lender and can take a few months to do so.
Key Advantages for Buyers:
Discounted Price: Short sale properties are often sold at a lower price than similar homes in the same neighborhood.
Fewer Bidders: With homes for short sale, you might have fewer individuals competing against you as a buyer compared to traditional homes.
Key Considerations:
Time to Close: A short sale can take longer to close because of the approval process and negotiations with lenders.
Condition of the Property: Short sale properties could sell in “as-is” conditions; meaning, buyers potentially bought themselves trouble.
Things to think about before you attempt a short sale
If you are a homeowner in Florida and considering a short sale, it’s important to know the legal and financial ramifications of how the foreclosure process will work out for you virtually now one year after Covid hit your south florida neighborhood. Talking to a Realtor who is well versed in short sales as well as talking to a priest or a lawyer would also be rather beneficial.
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Conclusion
A short sale is a great alternative for homeowners who want to get away from their mortgage and avoid foreclosure. It can offer many upsides, such as less damage to credit and the possibility of debt forgiveness, but it’s a time-consuming and complicated process. For buyers, short sales may offer a chance to buy a home at a discounted price though they can be time-consuming and require an open mind.
