A short sale is designed to prevent a seller from going into foreclosure. If the owner of a house has no way to pay for a mortgage, the lender may approve this type of sale to prevent losing money. Because short sales are often done in situations where the mortgage is currently worth more than the property, the lender will agree to accept less money than what the current owner owes, according to Freddie Mac.
The house will typically be listed at or below market value with the intention of attracting serious buyers quickly. Once a buyer submits an offer, it will be brought to the lender who either approves or declines the price and determines the financial well-being of the potential purchaser.
Here are some things you need to know before buying or selling a short sale property since the process is different than a traditional sale.
Damage to seller
Like foreclosure, a short sale can negatively impact a seller's credit. It's also important to note that there are two parts to every mortgage: the mortgage itself which allows a lender to resell a property should the borrower stop making payments, and a promissory note which is an agreement that the owner will pay back the debt.
Banks will sometimes require the seller to sign an unsecured promissory note that requires payment for the remainder of the debt not covered after the sale, explained Active Rain. For sellers looking to start with a clean slate, this might not be a good solution since there will still be a financial obligation for many months to come. To avoid having to pay off the debt over an extended period of time, lenders will sometimes accept an additional lump sum after the sale.
For both buyer and seller, the short sale process is not a fast one. Both parties will be required to submit more paperwork than needed for a standard sale. Once the bank reviews the seller's financial history and determines that the mortgage cannot be paid back, the property can be listed.
It's not until an offer is made that the lender approves the sale price, which can take weeks or months. It is not advisable to make a low-ball offer on these types of properties, explained NOLO, since a mortgage provider is unlikely to accept it and it'll waste everyone's time. Unlike a typical sale, negotiations are not a quick process as each point needs to pass through the bureaucracy of a bank. This also means that buyers usually need to purchase the property as-is with no repairs covered for known issues.
It's important that the buyer and seller are at "arm's length" in a short sale. This means the two parties do not know each other, or have any type of business or personal relationship, and the buyer will not donate or resell the property back to the seller. Extra documentation will be required to prove this to protect lenders from scams.