The Definition of a Short Sale Property

Get the lender's permission before listing a short sale.

Buyers shopping for real estate come across a variety of terms used to describe listings, such as "short sale" properties. Compared with a traditional listing, a short sale normally takes longer to close escrow. Yet some buyers consider short sales bargains, comparing them to foreclosures.

Identification

A short sale property is real estate listed for less than the amount necessary to pay off all debts on the property.

Significance

In a short sale, the property owner is the seller, yet the lender must give permission for the seller to list the property. After the transaction closes, the lender issues a deficiency judgment against the seller, demanding payment of the difference between the sale price and loan balance due, or agrees to forgive the difference. If the lender forgives the unpaid balance, the seller, under some conditions, may be liable for income tax on the forgiven amount.

Function

When property values drop, real estate loses equity. If the equity falls below the property owner's loan balance, selling the real estate for enough to pay off all the debts is virtually impossible. Being unable to sell the property becomes a special problem for the property owner who is unable to make the loan payments or who needs to relocate due to a job transfer or family emergency. Short sales provide an alternative to foreclosures.

Considerations

Some buyers perceive short sales as a bargain, due to the distressed nature of the transaction, yet the sale price might be at the current market value. While a seller may agree to accept a buyer's offer for less than the current market value, the lender makes the final decision and may counter or reject an offer it considers too low.

Features

Before agreeing to consider a short sale, lenders typically request an assessment of the current market value to determine if it is lower than the loan amount due. After the lender agrees to list the short sale, offers accepted by the property owner go to the lender for approval. Unlike traditional purchase offers, where sellers typically respond quickly, a lender might wait days or weeks before responding to the buyer's purchase offer. Yet the short sale process can vary by lender.

References

• Arizona Department of Real Estate: Short Sale Seller Advisory
• IRS: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
• U.S. Treasury: Making Homes Affordable
• Chase: Short Sale FAQ
• National Oceanic and Atmospheric Administration: Short Sale Information