If you have heard the term short sale thrown around in real estate investing seminars, networking opportunities, etc. but you don’t know what it means, this post will give you the definition, in non-legal terms.
Basically, a short sale occurs when a home owner needs to sell their property, but cannot sell it for what is owed on the property. If there is a buyer with an offer on the table for less than what is owed on the property, the contract can be considered by the bank, and if the bank accepts, the bank chooses to forfeit the difference between the sales price and the amount owed on the loan, and thus a short sale has occurred.
So for example, if John Doe owns a home with a mortgage of $150,000, needs to sell, and a buyer will only offer $125,000 for the property, there is a difference of $25,000. If the offer is presented to the bank, and the bank accepts it, the bank chooses to lose the $25,000.
Why would a bank do this, you ask?
Probably because John Doe is behind in his payments, and is in danger of losing the property. The cost of foreclosure to the bank is considerably high (I’ve read even as much as $60,000 or more), so the bank has to consider what it would cost them in terms of time and money to foreclose on the home, versus taking the quicker short sale exit. If they don’t stand to lose as much money and time on the short sale offer as on the foreclosure process, they just might accept the deal.
And this, my friends, creates an amazing opportunity for us as real estate agents and investors…