What is a Short Sale?
In a depressed market, the sale proceeds may fall short of the balance owed on a property's loans. If the lender decides that selling the property at a moderate loss is better than foreclosing, we have what is commonly known as a short sale.
How does a Short Sale work?
The property owner (mortgagor) must demonstrate to the bank (mortgagee) that they can no longer make payments and have a “hardship”. The owner then puts the property on the market and seeks to enter into a sale contract with a ready and able buyer at fair market value. The contract is then sent to the bank for approval. Sounds simple but the “hardship” verification and property valuation as well as other requirements are very tedious and time consuming.
What are some of the issues involved?
- Sellers must prove eligibility with mountains of documentation.
- Response time from the bank is typically months.
- Buyers must be patient and not need “immediate” responses.
- Agents and lawyers involved need to be specially trained.
- After months of waiting, the answer from the investor can be “no”.
- The property could be in the “foreclosure” process while the short sale is being negotiated, sold at auction and become “bank owned” before the short sale is approved.
