What is a short sale? Let's break it down. Say you're selling your home; however, the offer you get is so low, it won't cover the total amount you owe on your mortgage. But you need to unload it, so you'll take it. This is a short sale -- simply put, you end up "short" on paying back your lender.
According to the most recent data from real estate information company RealtyTrac, 5.1% of all single-family home and condo sales in early 2016 were short sales. Often homeowners are pushed into a short sale by personal financial troubles that make it impossible to pay their monthly mortgage. At the same time, they find it hard to sell at a price that would enable them to pay off their loan -- especially if local real estate market trends have driven down their home's value. This happened in many communities across the nation during the housing bust of 2008.
While selling a home under such circumstances is hardly ideal, many experts argue it's smarter than pursuing more drastic measures like bankruptcy or foreclosure. Here are a few of the benefits of a short sale for a distressed home seller:
- Short sales do way less damage to a homeowner's credit report and credit score than a foreclosure. This means they'll be in better shape to apply for a mortgage and buy a new home down the road.
- Homeowners have the dignity of being able to sell their own home. This is no small thing.
- Short sales enable homeowners to stay in the home until the sale is completed. Foreclosures force homeowners to vacate.
- While a seller typically pays all real estate agent commissions and other closing costs, in a short sale the seller pays nothing; the bank foots the bill.
How short sales happen
They start off just like any other home sale: You contact a Realtor (ideally one who specializes in short sales), list your home (mentioning that it's a "short sale/subject to lender"), then wait for an offer to come in. But once you accept, things get tricky. You'll need to get your bank's blessing -- and since lenders lose money with short sales, they're rarely eager to hop on board.
"Some banks may even prefer to foreclose, since they not only assume ownership of the property but may receive bailout money from the homeowner's mortgage insurance policy," says Marlene Waterhouse, a Realtor and the owner of Short Sale Solutions. On the other hand, a short sale may appeal to a bank, since owning and selling property are hassles it may prefer to avoid.
To assess whether to approve your short sale, banks will require you to submit some paperwork, including your offer letter as well as a "hardship letter" explaining why you can no longer make your mortgage payments, along with financial documents such as income statements or medical bills to back that up. At that point, they will most likely have your home appraised to determine if the offer you've received is fair. If it is, they may allow the deal to go through, although they may have some stipulations (more on that next).
How buyers can benefit
Short sales can be bargains for home buyers, but prepare to jump through a whole lot more hoops than with a typical sale.
"I wouldn't recommend them for first-time buyers, who may get frustrated with the extra paperwork and long waits," says Waterhouse. "A traditional sale takes 30 to 45 days to close after the offer is accepted. A short sale typically takes 90 to 120 days, or even longer."
The reason for these holdups is that the lenders -- which are stuck paying for closing costs that a seller would typically cover -- will often counter with their own demands in an effort to raise their bottom line. So, buyers might hear, "We'll accept your offer, but you're responsible for all repairs, wire transfers, and notary fees." Go ahead and negotiate, or walk away if you aren't satisfied with the terms of the deal; ultimately it's up to you to decide whether it's worth it to absorb these extra costs. When in doubt, ask your Realtor to help you crunch the numbers.
Bottom line? Short sales can be a viable solution for some. Done right, sellers, buyers, and the bank can all walk away happy.