What is a Short Sale?

What is a Short Sale, and how do Short Sales work?

The American Heritage College Dictionary defines a short-sale as “The sale of a security that one does not own but has borrowed in anticipation of making a profit by paying for it after its price has fallen.” We do not know about you, but we have no idea what that means!

For our purposes we will try and keep this as transparent as possible. A short sale, in its simplest form relative to real estate, is an agreement between a lender and a borrower to settle mortgage debt for less than the full amount owed. An example of this might be a lender, who is owed $100,000 on a property, agreeing to accept $80,000 as payment in full rather than demanding to be paid the entire loan balance.

In many situations this Short Sale represents a solution for a homeowner who can no longer afford to make the required payments to stay in their home and wants to refrain from ruining their credit through bankruptcy or foreclosure.

In our example, the reduction of a $100,000 loan down to an $80,000 settlement represents a 20% discount. When a short sale is correctly structured and performed, discounts of 20% or more are very common!

As a homeowner, would a 20% or even a 40% reduction in your outstanding loan balance help you sell your property? You bet it would! You would probably have buyers knocking down your front door with offers if you could just lower the asking price!

The same holds true for Realtors. The ability to list properties at discounts could easily make you a top seller in your office.

As for investors, just about every investor that we have encountered will buy properties at a 20 to 40 percent discount.

Getting back on subject; we now understand that a short sale simply implies an agreement between lenders and borrowers that allows a property to be sold for less than the original outstanding loan balance. The next big question is, “How can you persuade your lender (or your clients’ lender) to accept a short sale?”

In simple terms, you can accomplish this by presenting a systematic and convincing short sale offer package to your lender(s). Within this package you make the case for why it would be in the best interest of the lien holder(s) to accept a reasonable loss now, rather than incurring the ongoing expenses and possibly a much larger loss later.