Short Sales

What ARE Short Sales

Many people are under the impression that a short sale is merely when a seller owes more on their property than they can sell it for.  While this is in part true, it is by no means the whole story. This is because, despite the fact that the seller owes more than the value of the house, many times the seller does have other funds available and can come to the closing table with a check for the shortfall.

The difference between that scenario and the Short Sales we’re seeing on the real estate market today is that THERE ARE NO AVAILABLE FUNDS.  Many times the seller has already filed bankruptcy; they may have lost their job, dissolved a marriage, gotten ill…there can be many reasons for the unavailability of funds.  The fact remains, the seller has no money to bring to closing which creates a real Catch 22  He MUST sell the home (or face foreclosure) because he can no longer afford to pay the mortgage, but he CANNOT sell the home because he has no funds to bring to closing to cover the shortfall.

Enter the real estate Short Sale “solution”.  In most cases, a bank who holds the mortgage won’t even consider a short sale unless the mortgage payment is already 60 or 90 days late.  The short sale is really the only option prior to foreclosure that could possibly benefit the seller and the bank.  It benefits the seller because the impact of a short sale on his credit is expected to be less disadvantageous than a foreclosure would be.  The benefit to the bank is that, despite the loss they would incur by agreeing to take less than the mortgage balance, the foreclosure process itself generally means the additional costs the bank would incur would be substantial.  The bank is not in the business of owning and managing real estate property.   In addition, because of the short sale process, buyers can often realize substantial savings as well since short sale properties are generally priced substantially “below market.”

The Bank’s Perspective

Banks generally prefer not to have real estate inventory.  There are substantial costs incurred in the process of foreclosing to begin with, and once foreclosed on, there are substantial carrying costs until the property is ultimately sold.  Once the bank owns the property, it generally deteriorates.  When that happens, its value continues to decline, thus increasing the bank’s loss even further.  It is generally to the bank’s advantage to be out from under that property as quickly as possible. 

The Seller’s Perspective

The short sale represents a hope for the seller that he will not have to go into foreclosure.  When a property is foreclosed upon, the owner’s credit suffers greatly…and for a long period of time.  

While the short sale is not ideal, the expectation is the impact on the seller’s credit won’t be as severe as it would if he were foreclosed upon.  And the negative consequences would also likely be for a much shorter duration.   However, often there are adverse tax consequences in a short sale.  It’s recommended that any homeowner considering a short sale should consult a tax advisor with regard it’s potential impact.

When a seller concludes that a short sale might be their best option considering their alternatives, there are a number of things they need to understand, as well as steps they will need to take, in order to put themselves in their best position.  Visit the Short Sale - Seller's Cautions for more information.

The Buyer’s Perspective

The short sale represents an enticing option to prospective buyers.  The enticement is the fact that generally short sales are priced significantly below comparable homes in the market place.  Another element that is attractive to buyers is that short sales are still generally inhabited and not likely to see the same level of “distress” that is so common with foreclosure properties. 

But this extra potential does come at a “price”.  Probably the best way to characterize it is “uncertainty”.  For information regarding the impact of the short sale process on prospective buyers, visit the Short Sale - What Buyer's Need to Know.

DISCLAIMER:  The Short Sale process is not to be entered into lightly.  It does come with risks not typical of the “normal” real estate transaction.  If you are considering becoming involved in the short sale process as either a buyer or a seller, please consult with the appropriate professionals for guidance relevant to your particular circumstance (attorney, tax accountant, realtor, etc.)