Short Sale - Pros and Cons

What is a Short Sale? It’s an arrangement between the owner of a house and the bank holding his home loan to accept an offer for less than what the owner owes on the house. The deficiency (shortage) is the difference between the amount owed on the loan and what the bank collects at the time of the sale.

A Short Sale is not a Foreclosure. In a foreclosure the owner falls several payments behind on their house payments, the bank repossesses it and sells it. In a Foreclosure, almost always the bank will pursue the homeowner for the shortage. And they never stop trying to collect!

How does a seller get into a Short Sale situation? An owner, for various financial reasons, needs to sell his house. He finds he owes more on his house than he can sell it for. He takes the best offer he received and contacts his bank, requesting them to settle for less than he owes (the amount of the best purchase offer from a buyer).

All banks have their own procedures for approving and processing Short Sales, so you need to call and ask your bank for directions on how to proceed. But please know that nothing you discuss on the phone with a bank representative is binding. As with all real estate, it has to be in writing to be binding. In some cases the bank will allow the property to sell at the lower price, but considers the shortage as a ‘loan’ and will require the seller to pay back the amount. It depends on the bank and the agreement you can reach with them. At the very least they will report the shortage as 1099 income to the seller.  If the bank agrees to absorb the shortage and the transaction closes quickly, this will be less of a blow to your credit than a Foreclosure would be.  A Short Sale can be a slow and frustrating process, and sometimes it seems the bank is actually working against the sale! The truth is that usually a Short Sale is better for the banks than a Foreclosure. And their main goal, after all, is to try to get as much of their money back as possible.

Remember that before a bank can approve a Short Sale you must have an offer in writing. At that point you contact the bank and they send you a detailed packet to complete. The packet can contain an application, hardship letter, financial statements, tax returns, pay stubs, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender. You will generally not receive approval for 1-4 weeks, and many times they also change the terms. In some cases it all works and the transaction closes, but in other cases the buyer becomes frustrated with the change in terms and the delays in closing and he goes looking for something easier.

If you are considering selling your house and the market value is less than your mortgage amount, read some good information about Short Sales and then contact a Realtor who has done this before. If you are a buyer looking at a house that is listed as a Short Sale, it is helpful if your Realtor has experience in handling Short Sales. It can be cumbersome process but easier if you are well informed and know what to expect. Don’t wait until you are missing payments to consider a Short Sale as this will negatively impact your credit. All you have to do is show that your house can’t be sold for what you owe.