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What is a Short Sale? - Part 1

What is a short sale? - Part 1

Exterior of HouseA short sale(or pre-foreclosure) takes place when the sales price of a home is less than the outstanding mortgage balance on the property and the lender agrees to absorb the difference. 

Short sales happen at all price points - even homes in the millions.  Each short sale represents a family in financial distress for a variety of reasons such as divorce, job loss, health expenses, or poor financial decisions.

We meet with many people in Central Indiana looking to sell their homes and unfortunately we hear this scenario way too often:Dollar sign

 

"I'm having difficulty making my mortgage payments.  I'm afraid they are going to foreclose on me.  I would love to sell, but I still owe $200,000 on my mortgage.  According to the market analysis, my home will most likely sell for only $175,000.  I don't have $25,000 (the "short" part) to make up the difference."

In the example above - will the bank let the home be sold for $175,000 and absorb the $25,000 shortfall - ie...a "short" sale?

• It depends.  It's up to each bank to decide if they will accept less than the total due.  Every bank handles short sales differently and each homeowner's situation is unique.  One of the most important and least understood elements of short sales is that the homeowner must be approved for a short sale.  In other words, they have to provide proof to the lender that they can no longer afford their home.  This is called a hardship letter

Why do banks approve a short sale?

• Foreclosure proceedings are very expensive for banks.  It may be less expensive for them to accept a short sale if the homeowner is no longer able to afford their payments.  In that case it is a prudent business decision. Banks don't agree to short sales because they "feel sorry" for the owner or "understand" their circumstances. 

This artile is part of a series.  Check back or subscribe to read:

Part 2 - How Do You Buy a Short Sale?
Part 3 - Are Short Sales Good Deals?
Part 4 - Can You Sell Your Property as a Short Sale?

 

This article originally published for The Hoagland Team Blog - IndyChats.com

 

 

Unless otherwise noted, blogs are authored by Tonda or Steve Hoagland

 

 

Comment balloon 2 commentsTonda & Steve Hoagland • October 16 2009 05:31PM

Comments

Great explanation of short sales.  I think this is a term more and more people are going to get familiar with unfortunately.

Posted by Brian Brumpton, Boise Idaho Real Estate (Keller Williams Boise) over 8 years ago

Sad but true.

Posted by Tonda & Steve Hoagland, Real Estate - Greenwood Homes for Sale - Central I (Keller Williams Realty) over 8 years ago

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