What is a Short Sale?

A short sale means the owner owes more than the house can sell for in the current market or it is nearing foreclosure, and so the lender is agreeing to sell “short” of what is owed. So for example, if the seller has a mortgage of $500,000 but the current market valuation of the property is $350,000, the bank must agree to take a loss of $150,000. These transactions take longer because of bank involvement, sometimes up to 6 months from the time the offer is made.

While the seller will agree to accept and sign an offer, it’s really the lender holding the cards and determining if price and terms are acceptable. Nothing proceeds on the purchase transaction until the lender(s) have signed the offer and agreed to all terms. Very few short sale transactions reach closure – about 10%.

And bear in mind that if the short sale property is listed at, say, $250,000 that does not mean that’s what the bank will take for the home. Often, they counter at a higher price.

In some cases, there are multiple lenders or “investors” involved. Banks often sell mortgages in whole or in part.  For example, suppose the seller’s original mortgage was with Countrywide. Countrywide may have sold 50% of the mortgage to Bank of America and 25% to CitiGroup (and so three lenders must now agree to take a loss on the note — an unlikely result.)

Also, while the buyer is waiting to hear from the lender(s), other properties, non-short-sale, are selling and buyers may regret missing an opportunity while waiting.

Buyers looking at short sales need to also take into consideration liens against the property and be very certain to obtain clear title and purchase title insurance. There are situations where it can be nearly impossible to determine how many lenders/investors have a claim on the property.

Basically short sales are a fit for pure investors that can handle the risk and for those with the patience of a saint. Here is a diagram provided by Bank of America summarizing the process and parties involved: