What exactly is a “short sale” and who benefits?

With today’s “mortgage crisis” you hear a lot of terms thrown around. Foreclosure, Bank-Owned Properties, Loan Defaults, Short Sale are just a few.

If a homeowner is faced with a situation where he cannot make his payments and does not want to be foreclosed upon, he can sometimes negotiate with the lender to allow a “short sale”. This can often be the best deal for the homeowner as opposed to having his property foreclosed on. What it means simply, is that the lender agrees to allow the homeowner to sell the property for less than the loan balance and forgive the rest of the debt.

The seller benefits because he can walk away without owing any money. The lender benefits because they can get a troubled loan off their books without having to own the property and sell it themselves. The buyer benefits because he can get “good deal.”

So what’s the catch?

The catch simply is that the buyer and seller have to be really, really patient. Although the bank has agreed to the concept, they always put in a contingency that they must approve the details of the sale. Most banks are as slow as molasses in processing approvals of this sort. We’re not talking weeks - we’re talking about months.

They have agreed that the sale can be less than the loan balance but in their heart of hearts they don’t want to do it. So if the purchase offer is less than the loan balance it will go into a process (black hole) awaiting approval of a number of unnamed parties whose job, apparently, is to dissuade the buyer from actually buying the house.

That, of course, is a bit cynical, but that’s how it can sometimes seem.

If this should come up, talk with your Realtor and explore all your options. If you need to move quickly this may not be the right path to go down.