A short sale, simply put, is the process of selling a primary residence for less than what is owed to a lender.
A simple illustration will paint the picture.
A bank has the only lien against a home. That home is currently “underwater”, which means the owner owes more than the property is currently worth on the open market. Unless the owner, as seller, pays the difference between an offered sales price and the amount necessary to pay off the loan, there can be no deal unless the lender agrees to a reduced payoff amount which is the short sale.
ADVANTAGE TO THE SELLER
The owner is suffering the financial hardship of not being able to pay his house payments and his home is “underwater”. The pressure is immense to try and get the best deal to get from under this hardship and avoid the oncoming tsunami, the pain of foreclosure. Most owners in this dire circumstance are very motivated and if presented with an out to salvage some of their credit standing, peace of mind, and avoid foreclosure, are likely to accept any course that may appear to lighten their burden and be in their best interests.
Thus, a short sale, if presented to the homeowner in that window before foreclosure, may be a most helpful strategy. There are other strategies, of course, including deed in lieu of foreclosure or even a loan modification with a willing lender. However, if presented in a sensible and most timely manner, a short sale may prove the best course to undertake.
ADVANTAGE TO THE LENDER
Typically, the owner will choose to sell the home by a short sale in order to avoid foreclosure. The lender, most often a bank, will always consider what the estimated net would be if they either had to sell the property at foreclosure auction or repossess the house and sell it on the open market. The bank will always choose the best course for them to take and if that course is a timely presented short sale, a deal can be had.
ADVANTAGE TO THE INVESTOR
The most dynamic possibility with the short sale is the ability of an investor to negotiate directly with the owner. A sound presentation clearly establishing what is in it for the owner may seal the deal between the seller and the investor.
Next is selling the deal to that lender. If the investor’s offer is higher than what the bank believes they can acquire at foreclosure auction or by taking over the property and going through the process of selling the property themselves, they will accept the offer and give you a short sale approval letter. Then, at escrow, the investor will pay off the lien, as reduced by the express agreement between them, and the deed will be conveyed to the investor.
Short sales continue to be a chosen tool in the arsenal of choices an investor has to succeed in real estate. To master the mechanics, the science of the short sale, in a given circumstance, can be particularly profitable for a savvy investor.