Short Sale
A short sale is a complex real estate transaction in which a homeowner sells their property for a price that is less than the outstanding balance remaining on their mortgage loan. In this scenario, the proceeds from the sale are insufficient to pay off the debt in full, and the lender agrees to accept a discounted payoff to release the lien on the property.
This type of sale is often a pre-foreclosure measure, utilized when a homeowner is in significant financial distress and owes more on their home than its current market value, a situation often referred to as being “underwater” or “upside down.”
Purpose and Function
The primary purpose of a short sale is to avoid foreclosure. For the homeowner, it serves as a damage control mechanism, allowing them to exit an unmanageable financial situation with slightly less impact on their credit history than a full foreclosure would cause.
For the lender, agreeing to a short sale is a calculated financial decision. While they take a loss on the loan, a short sale is often less costly and time-consuming than the legal process of foreclosure, which involves significant legal fees, maintenance costs, and the burden of reselling the property themselves.
The Process
A short sale is significantly more involved than a standard real estate transaction and requires patience from all parties involved.
- Listing the Property: The homeowner lists the property for sale with a real estate agent, typically disclosing that it is a potential short sale.
- Offer Submission: A buyer makes an offer on the home. However, unlike a traditional sale, the seller’s acceptance is not the final word.
- Lender Approval: The signed purchase agreement must be submitted to the seller’s lender for approval. The lender will evaluate the offer, the seller’s financial hardship letter, and the property’s market value.
- Negotiation: The lender may reject the offer, accept it, or counteroffer. This review process is notoriously slow and can take several months.
- Closing: If the lender approves the short sale, the transaction moves to closing. The lender receives all proceeds from the sale, and the seller typically walks away with no cash.
Implications for Sellers and Buyers
A short sale presents unique challenges and considerations for both sides of the transaction.
- For Sellers:
- Credit Impact: While less damaging than a foreclosure, a short sale will still significantly lower a seller’s credit score and will remain on their credit report for up to seven years.
- Deficiency Judgment: In some jurisdictions, the lender may still have the legal right to sue the seller for the “deficiency”, the difference between the sale price and the original loan balance, unless the seller negotiates a waiver of this right.
- Tax Consequences: The forgiven debt may be considered taxable income by the IRS, although there are exceptions depending on current tax laws.
- For Buyers:
- Lengthy Timeline: Buyers must be prepared for a long wait. Getting lender approval can take anywhere from a few weeks to several months, making it unsuitable for buyers who need to move quickly.
“As-Is” Condition: Short sale properties are typically sold “as-is.”
