What Exactly Is A Short Sale?

Next week, I’ll be listing a house in Christiansburg.  That’s the good news.  The bad news is that just a few doors down, there’s a short sale.

I wanted my clients to see the floor plan of this particular house because it’s a little different than many of the others on the street, and so we took a little walk to look around.  As we were in the house, I mentioned that the property was a short sale, and asked if they knew what that meant.  Blank stares.

Not much has been posted on this blog about short sales because, well truthfully, we just haven’t seen too many of them.  There was this post, “What Is A Short Sale, Really?“, but that’s really about it.  I sense that short sales will become more prevalent here in the New River Valley though, as our real estate trends tend to be a bit behind many of the larger metropolitan areas – here’s to hoping I’m wrong, but if that’s the case than it’s likely we’ll see a rise of them in the next year or so.  But back to the story …

A short sale is simply when a homeowner owes more to the lender than their home is worth.  It’s an unfortunate scenario, but one that is pretty common in a lot of areas.  The impact of a short sale to a homeowners’ credit is often less of a hit than that of a foreclosure, but nevertheless it’s a tough pill to swallow.  And the impact on surrounding properties can also be tough to deal with, as well, as homes sold “short” will often drag down comparable home values.  A short sale isn’t always a lender’s first preference, but when it comes to choosing to foreclose – and then having to put a foreclosed property on the market – versus getting some kind of value for the property, I suspect most lenders will choose to at least explore a short sale with the borrower.

But a short sale isn’t for everyone.  As the borrower, you’ll need to prove to the lender that you can’t afford to continue making payments – this is done through what’s called a hardship letter, and in this letter you’ll need to explain – with verification – exactly why the payments are not being made.  Once the lender has agreed to allow the home to be sold short, the house can be put under contract … but it doesn’t get any easier.  There are any number of moving targets that need to be met, and as a homeowner you should know that not every short sale that goes under contract successfully makes it to the closing table.

The long and short of a short sale is this – it can be done, but it’s not easy, and it’s not foolproof.  At some point, because the bank is the one making the final decision on whether to accept less than what is owed, the decision-making is taken out of your hands; if you’re not comfortable with the uncertainty of that, a short sale may not be right for you.  And an agent who knows their way around a short sale is a must.

If you think you might need to address the possibility of a short sale with your lender, contact me and let’s talk.  There may be other ways of handling it, but even if there aren’t, we can get you through it.

Updated 2/2/10 2:10pm – Danilo Bogdanovic just posted a good addition to this post, entitled “How Long Do Short Sales Take?“.  If anyone would know it’d be an agent in the 51st state, Northern Virginia.

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