What Does Short Sale Mean to a Potential Buyer?

Short sales can take a long time to close escrow.

The term "short sale" signifies to a buyer that the property owner is listing real estate for less than what the owner actually owes on the property. The property owner expects to be "short" of funds at the conclusion of the successful short sale.

Identification

While the term short sale lets the buyer know the seller is selling for less than the loan balance, this is not the same thing as the property listed at below its market value. For the buyer, it is more important to know the property's estimated current market value, rather than the amount of debt the seller has on the property.

Function

Short sales typically occur when property values have dropped, and the property owner is unable to sell the property for enough to pay off its debt. For the property owner who can no longer meet her loan obligation or must move from the area due to a family emergency or job transfer, a short sale might be an alternative to foreclosure.

Features

Before listing the property in a short sale, the property owner obtains permission from his lender. After the property owner accepts an offer from a buyer, the offer goes to the lender to accept, reject or counter the offer. For the buyer, this can be a lengthy process. Just because the seller accepts the offer does not mean the lender will agree. Some lenders take weeks or months to respond to an offer. Making a full-price offer at the listing price does not guarantee the lender will accept the buyer's offer.

Considerations

While the property owner is technically the seller, the lender must give the final approval for the short sale. Often the lender requires additional paperwork from the buyer. Because each lender may have its own short sale procedure, real estate agents may not be able to accurately predict all lender responses and requests, especially if this is their first time working with the lender.

Significance

Before agreeing to a short sale the lender typically requires the borrower to prove the property has dropped in value and is no longer worth as much as the loan balance. They also want the borrower to show she can't continue meeting the loan obligation. The lender will forgive the unpaid balance of the loan, or issue a deficiency judgment against the seller for the unpaid balance. If the lender is forgiving the unpaid balance, the seller will be more open to accepting a lower offer from the buyer. Yet, this does not mean the lender will accept the buyer's low offer.

References

• US Treasury: Making Homes Affordable
• Arizona Department of Real Estate: Short Sale Seller Advisory
• Chase: Short Sale FAQ
• National Oceanic and Atmospheric Administration: Short Sale Information