Wikipedia defines a short sale as "sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold."
In understandable terms, short sale means a real estate transaction where the seller owes money in order to sell the house, so as a result the homeowner's bank must get involved. The seller's bank will review the financial assets and income levels of the seller and decide if they are in financial hardship. If the seller's bank determines the homeowners are in hardship, then the bank will excuse the debt and allow the sale. When the bank "excuses" the debt, they are not necessarily letting you walk free. The bank could also not-approve the sale and in this case the homeowner has to come up with the money owed to close escrow, keep their home and pay their mortgage current, or allow the bank to foreclose.
Impact to Homeowner of a Short Sale
When a seller succeeds with a short sale, they might walk away with several different results which are reported on their credit history. Due to the financial impact that these items might have on a seller's credit report, all sellers in this potential situation should consult an attorney and CPA.
Credit report to say:
1. "Settled, account legally paid in full for less than full balance" - bank has forgiven the debt
2. "charge off" - Bank has let the seller go with the right to pursue the seller for the amount indicated if in the future should the seller come upon a large sum of money.
3. "Promissory note"- bank lets the homeowner sell the home, but will require the seller to pay back the amount specified.
Sellers typically get into this position when the market value has dropped significantly since the homeowner purchased the property. Ideally a homeowner would pay their mortgage and wait until the market values increase before selling their home. But in many cases such as today, homeowners have lost their job and cannot make their payments or the homeowner had an adjustable loan that reset to a high interest rate making the payments for the seller too high. In these cases, sellers are in financial stress and will have to short sale the home or let the bank take the home away through foreclosure.
Another possibly for a short sale to occur is that the homeowner took out a second mortgage or a home equity line of credit (HELOC) when the appraised value of their property was high. In this case 2 banks will likely be involved with approving the short sale, which means more time for the buyer to wait and less likelihood of the sale being approved.
What does a short sale mean to the buyer?
When a buyer is trying to purchase a short sale property, there are a few differences from a "normal" real estate transaction.
1. The buyer must submit an additional form called a short sale addendum to account for details during the time the bank will take to approve the sale.
2. The buyer must be willing to wait on the bank to work through all their approval steps. This can take anywhere for 30days to 6 months for the necessary approval letter to be put in the buyer's hand. Once this approval letter is received, the sale continues as written in the contract.
a. Buyer must be aware that in the time that the bank is approving the sale, the purchase price and all other terms of the contract are fixed. This means if the buyer is purchasing in a downward market, then they must anticipate their offer to be fair value when the sale is approved. It is common however for buyer's not to expect the approval process to take so long and hence to back out of the contract.
b. In some instances, buyers may be able to find an "Approved short sale" on the market. This means that the first buyer walked away from the contract, but the seller is willing to sell at this original contract price. The new buyer can submit their offer at the approved price and expect less than 30 days turn-around time. This of course will only happen if the new buyer agrees with the approved purchase price.
Please share your experiences that differ from the explanation given above.
