What is a Short Sale?
What Constitutes a Bonafide Short Sale?
The plain answer to what is a short sale is a short sale is a property that nets the lender less than the amount due to the lender, after all costs of sale are paid. The mortgage itself does not need to be underwater to qualify for a short sale if the costs of closing the transaction do not leave enough money on the table to pay off the mortgage.
A short sale can be an underwater home, an apartment building or even vacant land.
If there is a mortgage balance that is greater than the market value of the home, that property is considered to be a short sale, providing the lender agrees.
Many people do not realize that a short sale can occur when the closing costs cut into the bank's payoff amount. The home can absolutely be a short sale, for example, if the accepted sales price is higher than the mortgage but not high enough to pay all of the closing costs and commissions. Further, in some instances involving two mortgages, the sales price might be high enough to pay off the existing first mortgage yet insufficient to completely pay the balance due on the second mortgage.
If there is a shortage involved to close, it is a short sale if the seller doesn't bridge that gap with her own funds.
A Short Sale is a Privilege, Not a Right
Not every property qualifies as a potential short sale in a bank's eyes. A bank must agree to grant a short sale.
Banks are under no obligation to approve a short sale. Banks will grant a short sale if the bank feels it is in the bank's best interest to approve the short sale.
It is in the bank's best interest to approve the short sale if the bank will make more money through the short sale than to foreclose. It is estimated that banks might save 25% to 30% on foreclosure costs to grant a short sale over a foreclosure, but some investor guidelines make it more profitable for the bank to foreclose.
What is Necessary for a Short Sale?
Most short sale transactions are handled by real estate agents who specialize in short sales. There are 4 essential ingredients to a short sale; however, strategic short sales, those without a hardship, are also possible. What makes a short sale work are the following:
- An underwater home
- A willing short sale bank
- A seller with a hardship
- A buyer willing to purchase the home
What Role Do Real Estate Agents Play in a Short Sale?
Some real estate agents throw homes on the market that will never close as a short sale. That's because the agents do not always qualify the short sale sellers. Some agents suggest unrealistically low price tags on the short sale, which the bank will never accept. It is wise to choose an experienced short sale agent who has closed at least 100 short sales. Here is what an agent does in a short sale:
- Determines the type of short sale. There are many types of short sales, from Fannie Mae short sales to regular, non-GSE HAFAs to a traditional short sale, and a few more in between.
- Gathers the required paperwork and submits the short sale package to the bank. Sometimes agents outsource this part of the process or they might hire a third-party to negotiate the short sale, but I prefer a personal, hands-on approach.
- Helps the seller to price the short sale home. The price needs to be attractive enough to entice a buyer to wait for short sale approval but high enough to satisfy the bank's BPO.
- Puts the home on the market. The agent must submit all offers received to the seller. Some offers will be lowball offers because buyers don't know any better.
- Negotiates the short sale. Sometimes sellers will hire a lawyer to do the short sale, but often, in states were it is permitted, it's the agent who negotiates with the bank on behalf of the seller.
- Submits the short sale approval letter to the seller. Most sellers want a release of liability and no deficiency to do a short sale. State laws tend to govern the terms in the approval letters.
Sellers should always get legal and tax advice before completing a short sale.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.