What is a Short Sale?

Watch any popular real estate show on television and you've probably heard a lot of different takes on short sales. Some people swear by them, while others avoid them.

But what is a short sale all about, really?

Simply, a short sale is the sale of a property for less than the amount owed on the mortgage. Short sales aren't quite the same as foreclosures: They're a negotiated agreement between a lender and borrower. Both parties are motivated to sell, but that doesn't mean it's always the best deal.

For a short sale to happen, two things need to be true:

• The homeowner is so far behind on payments that catching up isn't an option
• The house must be worth less than the amount leftover on the mortgage

With that in mind, short sales are most common at times when the housing market is in trouble. They are a "last chance" option for avoiding foreclosure, but for the buyer, the process can seem slow.

Buyers Beware This Big Myth Around Short Sales

The biggest myth around short sales is that the seller will push to get the sale done quickly.

Although the seller might be ready to move on, everything in the short sale process must be approved by the lender. And lenders – mostly big banks – have plenty of time to ensure they recover as much of the home's value as possible.

This means the process can go on for months.

How Does a Short Sale Work?

When buying a house, you might want to explore other options before short sales, especially as a first-time buyer. If you decide to go forward, it's important to understand exactly how the process plays out.

1. The Homeowner Engages the Lender
   Before a short sale can even begin, the current homeowner needs to work with the lender and do some persuasion behind the scenes. They have to prove not only that they can no longer make their payments (or catch up) but that selling the home is viable under current market conditions.
2. A Real Estate Agent Lists the Property
   If the lender gives the nod, the seller goes ahead with listing through a trusted real estate agent. Those interested in buying a house will find the property in all the usual ways: Online listings, virtual tours, and the rest. The goal remains to close on the property within 60 days.
3. The Lender Reviews The Buyers' Offers
   The lender has final approval on all buyer offers. A sales contract must be written up for each offer for the lender's review. In some cases, the lender may not respond to an offer at all. Most of the time, the offer is returned with a variety of proposed changes to make it acceptable.
4. The Buyer Appeases or Rejects Terms
   If they're still interested in buying a house under the amended terms, the would-be buyer can agree to move forward. They can also continue negotiations by rejecting certain terms or proposing alternatives. Buyers aren't bound by any terms until they decide to sign the contract.
5. The Short Sale Property Closes
   If the property closes, the title is transferred to the buyer. The lender receives all proceeds from the sale and the seller is released from the mortgage loan. The short sale is concluded and the buyer can carry on as a new homeowner.

Choosing an expert real estate agent is always crucial when buying a house, but it's especially critical for short sales. Lenders do everything they can to protect their interests – be sure you are doing the same!

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