What Is a Short Sale?

Ever come up short? That’s the figure-of-speech that the phrase short sale is derived from.

The proceeds from the sale of the home come up short of the total amount owed to the bank or banks, thus creating a short sale. Because the proceeds from the sale will not fully repay the lender(s), they must approve of the sale in advance and agree to take a reduced payoff.

When the real estate market hit the turbulence known as 2008, banks weren’t ready to deal with the deluge of requests they received for short sale approvals. And sellers and the real estate industry weren’t prepared to navigate the dysfunctional bureaucracy within many banks to get them approved. Which led to incredibly long delays in getting a sale approved, and in many cases this delay in time forced the seller into default and foreclosure.

Why would a bank accept a short sale? Following the mantra that something is better than nothing, a bank will usually approve a short sale if the seller can demonstrate financial hardship (because I don’t want it anymore but I’m still employed and can afford to make payments doesn’t get real far). The bank’s logic is that they will lose less money in a short sale than a foreclosure. So they cut their losses, approve the sale, and move on.

Banks have staffed up their short sale departments significantly in the past few years, and federal legislation has also been enacted that requires a much more prompt response from a bank in these situations. As a result, most banks have gotten much more efficient at the processing of these sales, and in my most recent short sale transaction I had final bank approval seven business days after the seller submitted all required documentation.

If you are a buyer and are considering purchasing a short sale, you should be prepared for a longer-than-usual escrow, and also for the possibility that the bank won’t approve the short sale and you will be unable to purchase the home.

If you are a seller considering selling your home and you think you might come up short, the most important thing you can do is to be well organized and prepared to submit a large amount of documentation to the bank in support of your short sale request.

If you’ve got specific questions, don’t hesitate to get in touch with us. We’ll do our best to get you the best answer for your situation.

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