Questions and Answers: What Exactly Is A Short Sale?
A short sale occurs when a home is sold for less than what is owed on it. It often means that the owner has an outstanding mortgage loan balance this is greater than what the owner can sell the home for in today's real estate market.
That is the most common application of the term short sale in real estate today but there are other meanings too. It could simply mean that the home is being sold for less than what the owner paid for it, irregardless of how much is owed since the home could be owned free and clear but still worth less than what the owner paid for it. Technically that is still a short sale.
Typically, when a home is a short sale, a buyer makes an offer that the seller accepts subject to the approval of a third party (the bank holding the mortgage). Once the buyer and the seller agree on price and terms, it's up to the seller to take that agreement to the bank and obtain approval from the bank (or banks if there is both a first and second mortgage - the second mortgage could be a home equity loan or a home equity line of credit) to sell for less than what is owed. When more than one bank is involved, both banks most approve the short sale. Usually the first lien holder nets the most money and the second lien holder receives a nominal amount as payoff of outstanding second mortgage to release the lien.
While it's up the the seller to obtain bank approval to sell short, the bank doesn't have to approve the short sale. The seller could, if possible, bring the difference between what is owed and what the home is selling for to the settlement table. As painful as that might be for the seller, if the seller has the ability to make up the difference, paying off the mortgage rather than asking for forgiveness from the bank will have the least impact on the seller credit.
It is not uncommon that the seller is behind in their mortgage payments when they finally decide to take the short sale route to get the home sold before the bank forecloses. Banks are under no obligation to wait for the borrower to get the home sold when they are no longer making their mortgage payments. "You pay you stay, you don't you go" is essentially how it works. So, often the home is in short sale status with a pending foreclosure. If the short sale isn't approved, then the bank hasn't lost anytime in bringing down the foreclosure hammer.
Short sales can take three weeks to three years to complete when the seller needs third-party approval. Some banks are better at processing and approving short sales, and some are not. Factors that affect the speed and outcome of short sales:
- The persistence of the sellers
- The persistence of the sellers' real estate agent
- Whether or not there is one mortgage or two
- Whether or not the mortgages are with the same or different banks
- Whether or not the mortgage is insured (FHA, VA)
- Whether or not the seller has a legitimate, demonstrable cause to sell short (job loss, medical reason, divorce, etc.)
There's no such thing as an "approved short sale". Really the only time there's any sort of tentative approval is when the bank has reviewed the borrower's situation, reviewed a contract of sale and rejected that contract because it doesn't net the bank enough money. Then, perhaps, the seller and their real estate agent might have an idea as to what the bank is willing take to approve the short sale. Otherwise, every short sale must go through the approval process established by the bank holding the mortgage.
If the short sale is approved by the bank, then the buyer will need to be ready to get on with the sale, sometimes many months after making the offer and negotiating on terms. Once approved, the bank will want to settle as soon as possible, often not more than 30 days from approval and sometimes less. While it will feel like a fire drill for the buyer, lenders, home inspectors, insurance agents, should all have been lined up ahead of time and ready to go at a moment's notice.
Most short sales are sold "as is" with the buyer having the right to inspect and void the contract for any reason what so ever. Sellers are often not in a financial position to make repairs anyway. If the buyer has moved out (which they sometimes will have done) utilities will have to be reestablished to conduct the home inspection. Lender mandated repairs, if the buyer is using FHA or VA financing, may be required. While the seller may not want to make those repairs and may not be able to afford to make them, it could be cause for the buyer to void the contract of sale since they won't be able to obtain financing unless those repairs are made.
Buying a short sale is not for the faith of heart or the impatient person nor someone with a deadline by which they must purchase a home. A short sale buyer once shared the following sentiment "Short sales are God's way of teaching buyers patience."