What is a short sale?

What exactly are short sales? The truth is that short sales are usually not fully discussed in many books about real estate, but they should be. Short sales techniques allow the purchaser to make a great deal on a home, put no money down, and get properties at substantial discounts. So why aren’t short sales discussed very often? This is probably because short sales in the past have not been a very good option for real estate investors. Success in short sales is related closely with the market.Short sales deal a lot in equity, and you’ll want to learn about actual equity within a home.

Let’s say an owner has a home they can afford and are not in default. Their home has an appraised value of $120,000. Currently they owe about $96,000 in their mortgage, meaning their home has $24,000 in equity. Now let’s look at a home that’s in pre-foreclosure, or an owner who is about to go into default. Let’s say that the owner knows that foreclosure is approaching and would like to get out. The house they own is worth $178,000 based on an appraisal. However, the mortgage they owe is now more than that at about $200,000. In this case, the owners have negative equity, so even if they sold the house at full market value, they would still end up owing $22,000.

In this type of market, you’ll encounter quite a few people facing foreclosure but without the means to pull themselves out. Some might be facing economic hardship like job layoffs, personal hardship, or perhaps their adjustable rate mortgage has become too much for them to handle. In these cases, these people are stuck with a mortgage they can’t afford, often with more money owed than the house is worth and often in a home with no equity. They know that foreclosure would be devastating to their credit and would like to find a way to quickly sell the house in order to save their credit and get rid of a burdensome mortgage payment. Enter the short sale.

The way you do this is through negotiation. Banks don’t want to have a property in foreclosure if they can prevent one. This is bad for their bottom line and bad for business in general. If a home goes into foreclosure, the bank will be forced to auction off the property in order to recoup their expenses. In these instances, the bank could end up getting considerably less for the property or if the property is not sold, the bank is now the owner of a property that does the institution no good. Consider that the banks foreclosure legal proceeding costs and the expenses for carrying these properties and later on marketing and selling them are far more than what they would be receiving with a fast cash closing.