Short sales are purchases negotiated with the owner and lender(s) before foreclosure. Typically the purchase price negotiated is less than the balance owed on the property. For investors, short sales present an opportunity to buy real estate below market value and help borrowers avoid foreclosure.
Short Sale Process
- Both parties consent to the short sale process, which allows them to avoid foreclosure, which involves more fees for the bank and foreclosure being reported on the borrowers credit report. However, this agreement does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
- The bank or mortgage lender agrees to discount the loan balance because of an economic or financial hardship on the part of the borrower.
- 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.
Short Sale vs Foreclosure
- Neither side is "doing the other a favor;" a short sale is simply the most economical solution to a problem.
- Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment.
- Borrowers are able to limit damage to their credit history, and partially control the debt.
- A short sale is typically faster and less expensive than a foreclosure.
- It does not extinguish the remaining deficiency balance unless settlement is clearly indicated on the acceptance of offer.