A short sale happens when a homeowner still has an outstanding balance on a loan, but sells the house for less than the total value or fair market value. The lender agrees in advance to accept the smaller payment to pay off the loan. For instance, someone owes $300,000.00 on a home, but they’ve started missing monthly mortgage payments. A potential buyer might submit an offer to go through with a short sale for $200,000.00.
As you can see, the lender would be losing expected profits in this case. Why would they agree to accept this offer?
It may be better than foreclosure
It really depends on the unique situation, but there are many cases where lenders realize that the borrower is not going to be able to repay the loan or become current again on their mortgage. This essentially leaves them with two options: a short sale or foreclosure.
The lender may determine that foreclosure isn’t the proper route to take. For one thing, it takes a long time. Borrowers have to miss multiple payments and be given repeated notices. It could take months for the financial institution to foreclose, and then they still have to find a buyer for the property after the foreclosure (if no one purchases the property at a foreclosure sale). Here in Florida, our foreclosure process is judicial, which means the lender would need to file a formal foreclosure lawsuit with the courts and essentially go through the entire court process to get to the foreclosure judgment. Only after this judgment is obtained will a foreclosure sale date be set. Lenders/banks often hold hundreds and thousands of mortgages, so becoming the owner of a singular property after a foreclosure might not appeal to them. This is why it might be more enticing to accept or approve a short sale and move on from the loan.
During this entire process, the indebtedness is also continuing to accrue. As the indebtedness accrues, the equity in the property securing the lender’s additional advances under the mortgage will continue to decrease, or might be depleted altogether. If there is not sufficient equity in the home, this might cause the loan to still not be repaid in full. Lenders may have the option to go after the borrower for a deficiency in this scenario, but that will be for another blog. The point here is that it might be in your best interest to speak with your mortgage company to see if they will approve a short sale.
In light of the above, the lender may determine that it is more efficient to simply sell the property at a slight loss. They can do this much more quickly, and they still get the bulk of the money that is owed. As the old saying goes, “a dollar today is worth more than a dollar tomorrow.”
Easier to sell
The lender may believe that it will be easier to sell the home if it’s a short sale. Potential buyers will see this as a way to get a deal on the property, meaning they may be more interested than paying full price after a foreclosure. A short sale presents an investment opportunity for investors and house flippers alike, so they may be willing to close more quickly, and with less contingencies, if a short sale is offered. As discussed above, this means the lender will be repaid quicker and can move on from this particular loan without having to hire an attorney to complete a foreclosure action.
Complicated transactions
These types of real estate transactions can certainly get complex. It is important for all involved to understand exactly what options they have and what steps to take. Here at Corey Szalai Law, PLLC, we are experienced in helping both lenders and borrowers negotiate these short sales. We also ensure that all documentation is properly drafted so that all parties (whether representing a lender or a borrower) are protected once the short sale is completed.