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Monday, April 30, 2012

What Is A Short Sale?

A short sale is when a seller/owner has a larger underlying debt service against the property and they are not able to clear title. And if they do not have the cash in savings or checking to bring the title or loan payoff in full current out of their pocket.   So the seller asks their lender for forgiveness of a portion of the loan that will be "deficient" and thus the lender takes a "short" payoff.

The seller gets to negotiate the terms of the offer with a buyer, but has to ask for approval of the terms with their lender, since the lender will have to accept the "net" sale proceeds as a payoff. 

An example would be as follows on a $200,000 listing

Seller's typical closing costs on the selling side only are roughly 10%....excise tax, title insurance, escrow fee, brokerage/commission, recording fees, etc.

Sale price  $200,000.
Seller side closing costs are $20,000
Loan Payoff $240,000
Net proceeds or loss <$60,000>

Seller either has to have $60,000 of their own money, or have their lender accept a payoff by less than $60,000 as a payoff in full.

Once mutual acceptance is received between buyer and seller the purchase and sale agreement is submitted to the seller's lender for approval and blessing on the terms.  This can take up to 30-180 days for approval.   The lender will look at the "value" of the home/offer to see if it is fair or undervalued before approving the agreed purchase price.  The lender will also evaluate their "borrower"/seller for their financial "hardship" and inability to repay the loan in full, or whether the seller has the capability or resources to repay.   Then they issue the terms of approval of the short sale. 

Sometimes the lender for the seller will accept.  Sometimes they reject.  Sometimes they counter to the buyer and change the terms of the offer.

As a buyer, there is no negative impact, other than the frustration of the waiting game and not being able to initially plan on a closing date and/or a possession date.

The impact to the seller is that it will effect their credit report and their ability to borrow money for a period of 3-7 years. 
Short sales have an array of complexities.  Whether you're the seller of a short sale or the buyer, having a knowledgeable agent to best represent your interest is key.  Contact me with your questions: 360-870-5191 or

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