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By now most of you have read an ad or seen a homes magazine with the words "Short Sale" on the home listing.  This label didn't used to be very common during pre-Subprime loan days, but it is unfortunately very common now.  So, just what is a Short Sale?
   
In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure.

In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.

Lenders have a department (typically called a loss mitigation department) which processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located.

In the Washington County area we are seeing over 150 NOD's (Notices of Default) posted each month.  However, less than 50% of them have actually been making it to the "Courthouse Steps" or a forclosure sale. 

Is this a good way for you to buy a home or investment property?  Well, maybe.  Typically, the lender will list the home for sale with prior agreement of the owner and a real estate agent at what appears to be a terrific price.  When you, the prospective buyer decide to make an offer on the short sale home, your offer must be signed by all parties involved before you have a contract to purchase. i.e. the seller, the lender and the buyer.  The lender may receive as many offers as it wants during the period of time that it has designated before if starts forclosure proceedings.  It may take 10 to 20 offers on the same property, and none of them has a valid contract until the lender picks one and informs the buyer's agent and the buyer that their offer was the chosen one.  This process of waiting for the lender has been known to take months in some cases.

So if you have the ability to stay with it to a conclusion, you may get a deal.  Oh, did I mention that this property will probably come with no property disclousres and it will probably be in "As Is" condition?  Don't expect the bank to put a dime into repairs etc.  This said, it can still be a great way to get a steal on a decent property. 

I will do a future blog on the effects short sales are having on our real estate market.  Until then, as always,

Best wishes,
Al E.