What is a short sale?

The recent rave in the real estate community seems to be the infamous 'Short Sale'. I want to take a little time and briefly explain what a short sale is how it is being used in the real estate community to liquidate distressed properties.

A short sale is a phrase used to described a sale in which the cost of the product or service being sold is actually more than the sales price of the product or service in question. Another common term to describe a short sale is being 'upside down'. The term short sale has become synonymous with any real estate transaction where the lender is agreeing to accept an amount less than is owed. Short sale has other definitions in the financial sector such as when a financial instrument is sold before it is actually owned. There are other variations of the meaning of short sale but for our purposes we will only discuss real estate transactions.

Short Sale Process
In real estate, a short sale is a rather lengthy process in which an agreement is made between the bank and seller for the bank to accept a lesser amount than owed. The steps in the process are as follows.

1. The seller needs to be in a distressed state, most of the time the property is in foreclosure. If a homeowner is
current on mortgage payments the bank will not approve a short sale. The loan is said to be 'performing'.

2. A lengthly package of documents needs to be assembled to prove to the bank that the seller can no longer
make payments. Most of these documents are the same ones used to qualify for the loan. You are basically
disqualifying the property owner. In addition to those financial documents a hardship letter needs to be
drafted explaining what caused the financial hardship. Also market trend reports, recent sales, market
analysis, news clippings and other information that can help the bank make a better determination as to why
they should accept a short sale.

3. The property has to be put on the market for sale and one must show a concerted effort to sell the property at
market value. There is misinformation out there where people believe the bank will accept any amount. This is
not true. The bank will only accept market value whatever it may be. A detailed record of activity needs to be
kept and submitted to the bank along with all the other documents.

4. Once a buyer is found, the purchase contract along with all the other documents is submitted to the bank for
approval. Once approved the sales process is continued as any normal real estate transaction would.

Most homeowners don't know that the bank will pay almost all required fees and commissions to all parties on behalf of the seller. Essentially the homeowner walks away paying nothing. The exception being that the bank may require an appraisal in which case the homeowner might be asked to pay for it. Also important to note, in no case may the homeowner walk away with any proceeds from a short sale. In some extreme cases you may negotiate with the bank for the homeowner to receive a small amount (Usually no more than $1500) for moving expenses and help with rent. Again this is rare and not the norm.

Along with the steps above, diligent communication and follow-up is a must in order to successfully negotiate, process and close a short sale. The entire process can take anywhere from 3-6 months to complete depending upon how quickly an offer is received. The bank approval typically adds 30 to 60 days to the normal sales cycle of a property. You can see why it is important to hire a competent Realtor with a knowledgeable team to expedite the process.