What is a Short Sale?

by | Sep 30, 2010 | Matt's Anecdotes

You may have heard the term “short sale” in the past couple of years.  As a real estate professional, we hear jargon so much that we often believe everyone knows what we know.  I was in conversation yesterday with a close friend who is in the construction industry and often buys, fixes up, and flips property and he asked me what a “short sale” was.  If my friend did not know, I have to assume that many people don’t know what a short sale is either.  The short version is that a short sale is when a lender decides to take less money at the sale of a given property than what the seller owes on the property.  Why in the world would a lender want to do that?  In a nutshell, money.  Lending institutions are in the business of loaning money to people.  Their core business is not owning, maintaining, cleaning, painting, marketing and selling real estate.  If they did not cut their losses and accept short sales–lending institutions would find themselves smack dab in the middle of these non-core businesses.  How do we know this?  According to a report by Realty Trac today, in the 2nd quarter of 2010 one in four U.S. home sales were foreclosures.  If a home goes into foreclosure, the lending institution will actually own the real estate, maintain it, and then have to sell it to get it off the books and this process costs them way more money usually than accepting a short sale (which is a pre-foreclosure action).  A short sale can take up to 4 months to process so beware and don’t expect a short sale to close as quickly as a normally listed property.  However, for a buyer with patience a short sale can be an excellent deal that is a win/win/win.  Its a win for the seller who can’t afford to pay their payments any longer.  Their problem gets solved and they don’t take the huge hit to their credit that a full foreclosure slaps on them (a short sale does about half of the damage of a full blown foreclosure).  The bank or lending institution wins because they don’t have the time/labor/money invested in owning and selling the property which would happen in a foreclosure.  The buyer wins because they often get a stellar deal on their new home.  Prices are already at the most affordable in a generation, interest rates are at the lowest since 1971, and they get an even better price because it is a short sale.  The escrow or contract period can be quite a bit trickier but for the discerning buyer–it is a great resource.

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