What is a short sale property?
Many different types of properties are being sold in a “short sale”. Many of us have learned the term “short sale” just recently and most of us associate it with homes.
For this article we are going to focus on strictly residential short sales and exactly what they are and why they exist. The definition of a short sale according to Wikipedia is: “The lender allows a property to be sold for less than the amount owed on a mortgage and takes a loss. This usually occurs when the market drops and the property is worth less than what the current mortgage is. Usually facilitated by a loss mitigator who negotiates that debt owed down to level where the property can be sold.” That pretty well sums it up.
As to the reason they are so common place today in America it is a combination of things, the biggest of which is home values. High unemployment is another contributing factor. But one of the biggest reasons, and this is one of my pet peeves is the fact that the banks made so many silly loans. Not only where these out of the normal income to debt ratios but many of them were the Negative Amortization and Adjustable Rate Mortgages. If you could fog a mirror you could pretty much borrow whatever you wanted. My favorite story was the NYC cab driver who borrowed $1,100,000 for his new home purchase. Needless to say he and his family are no longer living in the house and the bank has short sold it losing almost half of its value, WOW.
An example would be someone owes $300,000 on a home that may be worth $200,000. The home owner is many times behind on payments (but doesn’t have to be). The home owner contacts a Realtor to see if they can sell the property and the Realtor explains if necessary the process and may take the listing. Assume for this case that an offer of $200,000 comes in on the home. Once the Realtor has an offer on the property it is submitted to the bank for their approval. The bottom line is the bank will sell the house for the offered amount of $200,000, pay the Realtor their commission, many times pay all closing costs and take their losses and move on.
The reason that short sales are popular is that the bank figures that it is cheaper to loss some money now, than foreclose and then have a home in the non-performing assets department.
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