First, instead of explaining let’s use an example.
Let’s say a buyer purchase a house 2 years ago for $200,000 and put $20,000 downpayment and took a mortgage of $170,000.
Now let’s assume there was shift in the market and the value of the property today, 3 years after he purchased it, is $160,000.
Further, let’s assume the buyer cannot make his monthly mortgage payments.
Situation: $160,000 house with a mortgage of $170,000 and a borrower who cannot make the payments.
A Short Sale is an option for an owner to sell his house for LESS THAN WHAT’S OWED – in this case for $160,000.
In order for a Short Sale to go through the lender needs to approve the selling price since the lender is going to take a loss.
In other terms, the house is being sold at short to what owed.
Second, now that we understand what is a Short Sale let’s understand the complexity.
Note: keep in mind the mechanics can be different between one lender to another.
Typically, the owner/borrower need to
- List the property for sale at market value, ie for under owed amount.
- When there is an offer (#1) submit the offer to the lender to approve a Short Sale.
- Wait 3/6/9 months until lender response/dis/approves the offer price (or not).
- Put the house back on the market, since offer #1 is probably gone by now.
- Wait for offer #2 – typically the 2nd approval process with the lender is quicker.
How to Buy a Short Sale
- Ask the seller where in the approval process is the house?
- Submit an offer which includes:
- Zero or very small earnest money amount until lender’s approval is received.
- Only hold an inspection AFTER the lender’s approval is received.
- Terminate the contract at any point of time before lender’s approval.
Q: Is there any reason to a buyer to be concerned about buying a short sale?
A: No. The Short Sale is on the seller/owner side and doesn’t “transfer” to you the buyer.
Q: Is a house sold as a Short Sale indicates on a problematic house?
A: Not necessarily. Every house needs to be inspected and evaluated regardless if is a Short Sale or not. Short Sale typically indicates the situation of the owner.
Please do not see this explanation as a full explanation or suggestion about the Short Sale process.