Real Estate: Understanding a Short Sale

In today’s lagging economy and slumping housing market, the “short sale” has become an increasingly common strategy for desperate homeowners, lenders and real estate professionals to jump-start property transactions. As this option has become more and more prevalent, the definition of a short sale is often misunderstood, misapplied or simply not accurate.

 So, what is a short sale, really? In simple terms, it means that either the property seller or the lender is getting “shorted” on the sale of the property in question. A short sale is nothing more than an agreement between the property owner and the lender, or mortgage holder, to accept an offer from a potential buyer for less than the amount that is actually owed on the property. It is usually the result of purchasing a property for more than its fair market value.

But why would a lender agree to a deal like this? Well, on the surface it may seem like a bad business transaction for the lender, but given the current state of the housing market in most areas, many are willing to take what they can get. It would be more advantageous to the lender to liquidate the property and remove it from their books rather than foreclose and acquire basically what becomes known as a “non-performing” asset. Lenders are in business to make money and languishing property is not beneficial to their bottom line.

It is also important to understand what a short sale is not. The term has been tossed around by some in the real estate industry to mean any property that is sold below market value and this is simply not true. Buying a foreclosure (bank owned property) is not a short sale. Lowering the price of a home below its fair market value is not a short sale. These are just examples of a willingness to take less of a profit, or perhaps no profit at all on the sale of the property. A short sale means the lender is getting “shorted” what is actually due them.

A foreclosure differs from a short sale in that the lender basically repossesses the property from the owner as a result of non-payment and then places it up for sale, often for much less than fair market value.

While short sales can be more complex in terms of negotiations between all parties involved, it can provide a much better alternative for the homeowner than filing for bankruptcy or going into foreclosure. It is best to check with your local real estate professional when considering the option of a short sale.