We are constantly hearing and reading about short sales but what exactly is a short sale? A short sale is simply another option for sellers of properties and their lenders to consider when the amount owed on a property is more than the market value for that same property. This situation is also known as being "under water" on a property.
A short sale is when a lender agrees to accept less money than the actual amount of the loan secured by that property. Why would a lender/lienholder do this and what is the benefit to the seller/owner of that property?
In the first case, a lender does this for many reasons, some of which may not be apparent at first glance. First, the bank is acknowledging that the value of that property has dropped considerably, to the point that they may never get the full value of the loan on the property. Second, foreclosure of the owner's interest in the property, can be a costly and time consuming process for the lender. Some of these costs are attorney fees, repairs to the property, costs associated with the resale, and the potential liability until the property is sold. Foreclosure is also very regulated by statute and thus takes a long time to complete. During that time, the asset is essentially a liability and by agreeing to a short sale, the lender is essentially saying that it would rather take a loss on the loan than taking title to the property and then going through the resale process.
For the owner of the property, the most obvious reason why a short sale makes sense is that it allows that person to get out from underneath what most likely is a burdensome mortgage payment. However, it is important to realize that most lenders will require that the seller be in some kind of financial hardship, although it is not always the case. Second, the thought of going through the foreclosure process can be a frightening, stressful and nightmarish experience. With a short sale, the seller can avoid all of this. Plus, with recent legislation, the tax consequences that previously made short sales undesirable have been minimized. Also, a short sale may not damage a homeowner's credit as much as a foreclosure will.
In conclusion, a short sale is increasingly becoming the most viable option for both homeowners and lenders faced with severely declining property values and a worsening economy. It can be characterized as a kind of mid-point between a lender foreclosing on the property and the homeowner filing for bankruptcy. In either of those situations, the parties incur more costs and suffer more harm than simply selling the property for less than what is owed on it. Until the stability returns to the real estate and financial markets, it remains the most viable option.
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