What Is a Short Sale?

The real estate crisis that is sending the nation into economic turmoil is causing many desperate homeowners, unable to pay their mortgage and at risk of going into foreclosure, to sell their homes as short sales. Short sales are tense transactions where the lender – usually a bank – will accept a discount on the loan payoff in order to get rid of the whole thing and just close the books on it, without going into the hassle of foreclosing.

Let’s say you are looking for a home in Los Angeles. You happen to find one in a really swanky neighborhood, such as Bel Air, that is selling for far below the average in that specific market. The home may very well be a short sale. Before you do anything, you need to verify whether the home is a short sale. Short sales, where the lender is going to get less money out of the whole deal than planned, requires a lot of negotiation – and if you’re trying to buy a short sale home, you could be looking at a seriously protracted situation. Not between you and the seller, but between the seller and the lender. If there is a second lender involved in the mix then the negotiations become much more complicated.

People who want to short sell their homes also need to be on guard for the short sale’s notorious complications. Short sales may save you the embarrassment of going into foreclosure, but they can be real headaches. Lenders are loathe to approve short sales because it means they could conceivably take a loss on the loan they gave you. In order to avoid that you’re going to have to have one heck of a sob story, and they’re going to fight for every penny that they can get.

Both buyers and sellers in short sales need to speak to real estate professionals before they try to make a go of a short sale. Real estate lawyers also should be consulted, because short sales can create all kinds of tax, ownership and debt issues.