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- For short selling in the financial markets, see Short (finance)
A
short sale is a sale of
real estateReal estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location.
"Real estate" The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin...
in which the sale proceeds fall short of the balance owed on the property's
loanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
. It often occurs when a borrower cannot pay the
mortgage loanA mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
on their property, but the lender decides that selling the property at a moderate loss is better than pressing the current debtor. Both parties consent to the short sale process, because it allows them to avoid
foreclosureForeclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like...
, which involves hefty fees for the bank and poorer credit report outcomes for the borrower.
Process
In a short sale, the
bankA bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money.Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds...
or
mortgageA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt...
lender agrees to discount a
loanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
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. 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 foreclosure or continued non-payment would entail. Borrowers are able to mitigate damage to their
credit historyCredit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy...
, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Lenders often have
loss mitigationLoss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner...
departments that evaluate potential short sale transactions. The majority have a pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of
equityEquity, in finance and accounting, is the residual claim or interest of the most junior class of investors in an asset, after all liabilities are paid. If valuations placed on assets do not exceed liabilities, negative equity exists...
(or lack thereof), by determining the probable selling price from an
appraisalEconomic appraisal is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and...
or
Broker Price OpinionBroker’s Price Opinion, or BPO, is a method that a real estate broker uses to estimate the probable selling price of a real estate property/house...
(abbreviated BPO or BOV).
Lenders may accept short sale offers or requests for short sales even if a
Notice of DefaultA notice of default is a notification given to a borrower stating that he or she has not made their payments by the predetermined deadline. It dictates that if the money owed is not paid in a given time, the lender may choose to foreclose the borrower's property...
has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from the 2009 foreclosure crisis, they are now more willing to accept short sales than ever before. This presents a opportunity for "under-water" borrowers who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure as a result.
Additional parties
Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders - such as second mortgages,
HELOCA home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed period , where the collateral is the borrower's equity in his/her house...
lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required
mortgage insuranceLenders Mortgage Insurance , also known as Private mortgage insurance in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan...
on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Unsurprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. The best sources of knowledge and expertise in short sales are short sale negotiators, loss mitigation specialists, and real estate lawyers who specialize in short sale.
Consent
Short sales are different from foreclosures in that a
foreclosureForeclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like...
is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Any short sale contract includes a contingency where the bank must approve the sale.
Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be.
There are several defenses against this. If the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the bank. "Bank Approved Short Sales" are advertised by real estate advertisements, indicating that a
real estate brokerA real estate broker is a term in the United States and Canada that describes a party who acts as an intermediary between sellers and buyers of real estate and attempts to find sellers who wish to sell and buyers who wish to buy...
has verified the selling bank's position. This still does not guarantee acceptance, and it often does not take junior lien-holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower's decision.
Credit implications
Short sales are a type of settlement, and they adversely affect a person's credit report, though the negative impact is typically less than a
foreclosureForeclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like...
. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information, it is typically possible to obtain another mortgage 1-3 years after a short sale.
While lenders sometimes forgive the remaining loan balance, other
lienIn law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
-holders likely will not. Further, it is common for a lender to omit updating mortgage balances zero balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.
Business
Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.
See also
- Mortgage Forgiveness Debt Relief Act of 2007
The Mortgage Forgiveness Debt Relief Act was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years,...
- U. S. legislation affecting short sales of residential property.
- Deed in lieu of foreclosure
A Deed in lieu of foreclosure is a deed instrument in which a mortgagor conveys all interest in a real property to the mortgagee to satisfy a loan that is in default and avoid foreclosure proceedings....
External links