What is a 'Real Estate Short Sale'

A real estate short sale is any sale of real estate that generates proceeds that are less than the amount owed on the property. A real estate short sale occurs when a lender and borrower decide that selling a piece of property, thereby absorbing a moderate loss, is preferable to having the borrower default on the loan. It is therefore an alternative to foreclosure, and it helps a borrower avoid having a foreclosure appear on his credit report.

BREAKING DOWN 'Real Estate Short Sale'

A short sale, also known as a pre-foreclosure sale, is the act of selling a home or other type of property for less than the amount that the current owner owes his lending institution. A short sale is only possible if all parties involved, including those who are owed money, agree to take less than the outstanding obligation. Sales of this type are therefore slow and are known to fall through fairly often.

A short sale is often as good for the buyer of a property than it is for the seller of the property. Sellers who choose to list their property in a short sale are normally in financial distress and need a way to sell property prior to foreclosure. This type of sale protects a seller's credit somewhat. Conversely, buyers in a short sale benefit through a reduction in closing costs and other fees.

An example of this would be if borrower has a mortgage with an outstanding principal of $250,000 and a home value of $200,000. If he decides to sell the property, it would sell for less than the mortgage amount, and would be considered a short sale. The difference of $50,000, minus closing costs and other costs of selling, is considered the deficiency. The lending institution is paid the difference between the mortgage value and the deficiency.

Things to Know About a Short Sale

Even though a short sale hurts a person's credit score less than a foreclosure, it is still a negative mark on credit. Any type of property sale that is denoted by a credit company as "not paid as agreed" is a ding on a credit score. Therefore, short sales, foreclosures and deeds-in-lieu of foreclosure all negatively impact a person's credit.

Short sales don't always negate the remaining mortgage debt after a property is sold. This is because there are two parts to all mortgages: a promise to repay the lender and a lien against the property used to secure the loan. The lien protects the lender in case a borrower can't repay the loan. It gives the lending institution the right to sell the property for repayment. This part of the mortgage is waived in a short sale.

The second part of the mortgage is the promise to repay, and lenders can still enforce this portion, either through a new note or through the collection of the deficiency. Regardless, lending institutions must approve the short sale, and borrowers are sometimes at their whim.

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