Exactly What Are Short Sales?

How Are Homes Defined as Short Sales?

What is a Short Sale?
Agent explains a short sale to clients. © Big Stock Photo

Even though short sales have been around for a while, before 2005, most people had never heard of a short sale. If you had asked the average home buyer or seller back then: what are short sales, they probably could not tell you. So, if you are wondering what are short sales, you really are not alone.

First, realize that there is a lot of misinformation online about short sales. You've got mostly real estate agents, short sale seminars companies and lawyers who are seeking more short sale business through blogging and posting on websites that deal with short sales.

You'll read something about short sales on one site that will be in direct conflict with information found elsewhere.

That doesn't necessarily mean the explanation you receive about short sales is wrong. It means that short sales change, and the rules change constantly. Short sales are always in motion. Or, it could mean the site you are on was written by idiots. Hard to say.

What Are Short Sales?

You will hear the definition of a short sale that the owners are in default, but that is not an accurate description. Not every short sale requires a default. Not every seller of a short sale is in foreclosure.

Short sales happen when the bank agrees to accept a payoff for less than the balance of its loan. The amount of your mortgage is not important. What is important is the market value of your home.

You can do a short sale if the your home is worth more than your mortgage as long as the net proceeds are less than the total balance of your loan.

Contrary to popular belief, your home does not need to be an underwater home to do a short sale, although most homes are underwater.

What Makes a Home a Short Sale?

It is the net proceeds to the bank that determine whether the home is a short sale. If the net proceeds of sale are less than the amount owed to the bank, then that home is a short sale.

This can happen even if the home is worth more than the mortgage.

To better illustrate, imagine that your home is worth $200,000. Your mortgage, let's say, is $190,000. On the surface, this does not appear to be underwater or a short sale. However, once you deduct the costs of sale, you will not have enough money to pay the mortgage in full. Once you figure out your seller closing costs, including the commission, you may find that sum could be as much as $16,000 or more.

$200,000 less $16,000 in closing costs equals a net of $184,000. In this instance, you are $6,000 short of paying off your mortgage. If you have $6,000 in the bank and want to bring it closing, you could do that, and then this sale would not be considered a short sale.

If you do not have $6,000 and you still want to sell, you can ask the bank to do a short sale. If the bank agrees to accept $184,000 in proceeds, then your sale becomes a short sale.

 

How Are Short Sales Sold When a Seller is Not in Default?

Although many short sales involve a home in foreclosure, not every short sale is a pending foreclosure. Not every bank requires a short sale seller to stop making mortgage payments. Some sellers can qualify for a short sale without being in arrears.

With many banks, it is the possibility of a default -- the inevitable fact that if a home owner continues on a particular path that the home owner will at some point down the road be unable to make mortgage payments -- that can qualify the seller. It not always necessary for the seller to have fallen behind. If a seller can do a short sale without late payments reflecting on a credit report, it might result in a better FICO for the seller.

There are also certain banks that are agreeable to a strategic short sale. These are short sales in which a seller can actually afford to keep the home and to continue making payments but chooses not to. The concept of a strategic short sale raises hackles among some people who feel this practice is unacceptable. That's because some people believe they have a right to impose their beliefs and moral attitudes on another.

Everybody has a right to their own beliefs. Not everybody has a right to impose those beliefs on another.

One bank that has been proactive in short sales is Bank of America. Sellers might qualify for a Bank of America short sale under circumstances that another bank might deny. If a seller would like to do a Bank of America Cooperative Short Sale, for example, a seller should contact a short sale agent who specializes in Bank of America short sales.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.