Comprehensive Guide On What Is A Short Sale In Real Estate

Real estate is a complicated landscape to work in. The reason behind this is simple: too many cogs to run this machine. However, one of the most common and interesting aspects of this machinery is the short sale. But what is a short sale in real estate?

Why is it so important? 

This article will answer all of these questions and more. Therefore, stick around to learn all you can about short sales and how knowing about them can help all of you young investors. Hence, let us follow along without wasting a single minute of our time. 

What is a short sale in real estate? 

So, what is a short sale in real estate? In simple terms, a short sale is when the seller asks for a lower price than the overall due of the current owner’s mortgage. A short sale is generally a sign that the seller is on the verge of a financial crunch.  

A short sale is a unique sale proceeding in which all the proceeds of the sale are directed to the lender. The entire process is rigged in a way that ensures the seller washes their hand of the liability. In many cases, the lender simply forgives the remaining balance and files for a deficiency judgment.  

Deficiency judgment rules that the seller or the primary owner has to pay the remaining balance. Therefore, the short sale arrangement helps every party involved.  

What motivates a short sale? 

Generally speaking, short sales mostly occur when a homeowner has failed to pay mortgages and is staring at foreclosure as an option. This is one of the only ways a person can actually salvage their situation.  

In other cases, a short sale can also be a viable option when the housing market is facing a crunch. One such example is the 2007-2009 financial crisis. The crisis caused house prices to plummet sharply, and sales slowed. This is why short sales were a popular way to deal with this problem. 

Lender Sign-Off 

One of the most important parts of the entire process is the lender’s sign-off. What is a lender sign-off? Think of this as a permission taken by the owner from the lender to put the house on the market to execute a short sale. 

A short sale is a complex process and requires pre-approval from the lender. The entire process requires lengthy paperwork and transactions. In some cases, the paperwork and approval can take up to four months to process.  

Special Consideration 

In many cases, people tend to lack a clear understanding of what a short sale does to the seller’s credit score. To understand what is a short sale in real estate, you must understand its implications.  

A short sale definitely hurts the credit score of a seller. However, this does not affect the credit score as badly as a foreclosure. Therefore, you must remain prepared that this will affect your credit score.  

Moreover, a short sale might let the seller minimise their financial obligation toward the company. However, the lender would still exact the difference from the seller after a stipulated period. Therefore, a short sale does not mean that you can shrug off your financial responsibilities.  

Foreclosure vs Short Sale 

When homeowners lag in payments, they generally tend to face two outcomes: foreclosure or short sale. Both of these outcomes tend to affect a credit score. However, both of them are wildly different from each other. Here are some of the differences between foreclosure and short sale. 

Foreclosure Workings? 

Foreclosure is the final option that lenders tend to go for. In foreclosure, the lender seizes the property in the hopes of recouping some money from the deal. A lender generally initiates foreclosure. 

 Foreclosure is a drastic step that can have a profound impact on a person’s mental and spiritual well-being. In most cases, foreclosed properties get listed again and appraised for future sales.  

Short Sale Workings? 

Short sale, on the other hand, is a more time-consuming process. Homeowners generally get to stay involved in the process of a short sale. This process is more time-consuming, as it involves two parties. 

Unlike foreclosure, a short sale allows sellers to buy a new home with certain restrictions. However, the extent and the gravity of the limits are decided by the authorities. Then again, a short sale is one of the most labour-intensive transactions.  

Therefore, closing a short sale can take longer than a foreclosure. However, the minimal effect on the credit score makes it worth it.  

Short Sale Alternatives 

Many sellers tend to resort to short selling when they feel that they have run out of options. However, that is not the case. In many cases, short selling is not the only alternative option that is out there. There are alternatives as well.  

One of the most useful alternative means of Short Sales is PMI, or Private Mortgage Insurance. PMI covers the mortgage if the company believes that you have the prospect of recovering from your current financial slump.  

Another way of dealing with such a situation is to get a loan modification. Loan modification is a useful means of handling bad loans. However, it can affect your overall credit score and make things worse in the long run.  

The Process of Short Sale 

To know what is a short sale in real estate, you must understand how the entire process works. This will enhance clarity and ensure a smooth outcome.  

Step #1: The first part of the whole process is to convince the lender. This can be difficult since many lenders do not want to go down that route, as it takes time and can give lower ROI. 

Step #2: Consulting a professional is a paramount need. You cannot manage the complicated nuances of the entire process if you do not consult professionals.  

Step #3: Setting a price that is lower but not too low, since the difference needs to be repaid still.  

Step #4: Gather all your documentation and gather buyers to get the property off your hands and initiate the short sale procedure.  

Step #5: Submit the proposal of your short sale to the bank to close the process entirely.