Short Sale: The Most Ironic Real Estate Term Ever

A few years ago, you would see "SHORT SALE!!!!!" included in listing descriptions, enticing people to look at the home, ensuring them that they were getting a great deal. Today, since there are so many short sales on the market, will you rarely see it proclaimed in the description. Usually, the information will just be silently listed in the "Terms" section. Why the switch in stigma, and more importantly, what exactly is a short sale?

A short sale occurs when homeowners sell their home for less than they owe on their mortgage. The lender then receives the proceeds of the sale, and generally forgives the seller the difference. This process allows both the lender and the home owner to not only avoid foreclosure, but also the negative consequences that occur for both parties (do NOT believe anyone who tells you that banks gave out inappropriate loans in 2006 in the hopes that they would gain all of the properties through foreclosure proceedings - banks must pay hefty fees and go through an incredibly complex process to foreclose on a home that can take over a year).

Easy peasy, right? The home owner sells their home quickly, moves on with just a mark on their credit report for the next seven years, the bank gets some proceeds from the sale, they both avoid foreclosure, and the buyer gets an amazing deal on a house! Pizza and cake for everyone! Well, in FantasyLand it happens that way, but in the real world, it does not.

The reason why "short sale" is such an ironic term is that it can take months, if not years, to get through all of the paperwork and to get all of the parties to agree on a selling price. But wait, since the seller and the lender already agreed to this arrangement, doesn't the bank just have to sign off on an acceptable offer and they can all have cake/pizza at the swiftly scheduled closing? Again, that's in FantasyLand. In the real world, there are multiple parties that can be involved in a short sale, all with some power to prevent it from going through.

Besides the seller and the primary lender (the one who actually holds the original mortgage agreement with the owner), junior-lien holders may be party to the agreement. These folks include secondary lenders (the banks who bought the mortgage from the primary lender, usually in exchange for other equity), tax-lien holders (not real estate taxes, but rather outstanding income taxes, corporate franchise taxes, etc), mechanics lien holders, and even the people who insure the private mortgage insurance, since they will most likely have to pay a claim to the primary lender and want to make sure that payment is as small as possible.  All of these people want to prevent the home from selling for too little because that decreases (or increases in the case of the insurers) their piece of the pie.  Having to get approval from all of these parties can draw out the process.

Should you never place an offer on a short sale? No, not necessarily. If you see a home and fall in love with it, even if it is a short sale, put an offer in. As long as you are not under a tight time line, you can wait the extra time it would take to get into your dream home. For those of you who may want some extra room and don't need to move out tomorrow, or you just put your home on the market, a short sale may be a great choice and can get you into a home that you couldn't have afforded in 2005. As always, consult a Realtor to determine the best path for you. And if your Realtor balks at the thought of putting an offer in on a short sale (because, I'm not going to lie, they are a TON of work for all of the agents involved), give me a call.