How Does a Short Sale Work

Short sale is a distressed homeowner situation whereby:

• Net proceeds from sale is less than amount owed to lender. A Short Sale allows the homeowner to sell the home for less than the total amount due – this includes loan amount, closing costs, transaction fees and third party negotiations.  As one of the main approval criteria for short sales, the seller must show DOCUMENTABLE HARDSHIP.
• Last resort before a foreclosure.  A short sale is the last resort before the bank foreclosures on the property.  The bank often times looks at this on a case-by-case basis.
• No proceeds to seller. Since the bank is “short” on the amount they receive from the sale, the seller receives no proceeds from the sale.  This is often explicitly noted in the bank’s approval of the short sale.

Homeowner Short Sale Consequences

Advantages. Allows homeowner an alternative to foreclosure and prevents them from being evicted from the home.  Also allows them to leave the home on their own timetable.  Often times, the adverse impact on the credit from the short sale is less than that of foreclosure.

Disadvantages. Homeowner may have a tax liability in the case of debt forgiveness.  In such cases, the seller should speak with an accountant or tax attorney.

Homeowner may remain liable for deficiency (the amount “short”) or contribute funds at closing or maybe required to sign a promissory note.

Lender/Bank Short Sale Consequences

Advantages. Allows them to remove assets off their balance sheets – often times off of their nonperforming portfolio of loans and allows them to free up funds to reinvest or reloan.  They can also mitigate losses by not having to incur costs associated with foreclosures and REOs such as attorneys fees, holding costs, and marketing expenses.

Disadvantages. A Short Sale can require coordination between additional parties – third party negotiator, BPO agent, investor and junior liens.  The success rate for short sales are varied, but many believe it to be 30%.  While ShortSalePro has had better much better success rate, that tends to be the exception rather than the norm.  Short Sales are time consuming which sometimes involve both fickle buyers and sellers.