What Is a Short Sale? Knowing The Basics

This is a common term in business. A short sale can be viewed in two aspects; a short sale as used in stocks and a short sale as used in real estate. We shall focus on a short sale in the real estate aspect here.

In the case of a real estate short sale, there are basically three aspects in which you can look at it; the buyer’s perspective, the banker’s perspective and the seller’s perspective. The three parties play a crucial role in the short selling process.

Let us now understand short selling at a glance. As a seller, you can short sale your house if you have difficulties in making payments for your mortgage. If as a homeowner you are facing foreclosure because of difficulties in remitting the payments then the bank may consider short selling your house. In this case, the bank will take less than what is due to them. For instance, in case you owe the bank $ 1m on the house, the bank may take $9.5m and consider that loan fully paid. The other question that may arise, why should the bank consider a short sale and recover less than what is due to them? Well, in case the bank wants to foreclose the house then they will sell the home. This translates to another much involving process where they need to look for a real estate agent who will fix the property and then wait for a long time, numbering months, before it is sold. This is the reason why the bank decides to short sale so that to a property investor so that they can get the cash quickly.

In case you are a buyer who wants to purchase a home at great discounts then you should be timing a foreclosure. Just approach the owner with a well written letter when you note a home in which you are interested, stating your intentions to buy the home. Go ahead to inquire from the owner if their bank is interested in selling the home short. If the owners are solvent then they won’t hesitate to sell the home short. You could also contact a real estate agent and inform them of your intention to buy the home specifically on a short sale.

Short selling has numerous benefits to all the three parties directly involved here:

  • The owner avoids a foreclosure which normally has a greater negative effect on their credit report.
  • In case the lender participates in a short sale program that is supported by the government then they stand to benefit up to $5,000 to enable them complete that short sale.
  • A short sale certainly lessens the possibility of a current debt ensuing on the lender. In other words, a deficiency judgment is avoided.
  • It has a lesser impact on the future housing prospects of the homeowner because the homeowner can easily qualify for another mortgage after two years of the short sale in contrary to a foreclosure where one has to wait for seven years in order to qualify for another mortgage.

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