What is a Short Sale?

We have had many requests asking for an explanation of just what a short sale is and the effects it may have on a seller

What is a Short Sale?

What is a Short Sale?

It is common today to hear about a “short sale” when it comes to real estate. We have had many requests asking for an explanation of just what a short sale is and the effects it may have on a seller. Let’s take a brief look at just what a short sale is and how it works.

When you think of buying real estate you first have to determine just how much you are willing to invest, what are you willing to spend. This money has to come from somewhere. Either you are going to pay cash or you are going to borrow a certain percentage of the purchase price. If you borrow, then the lender will secure the loan with a note, this is the agreement that lays out the terms of the loan, interest rate, term or the loan and amount of the loan. The note is secured by a mortgage of the property itself. If you live up to your end of the bargain then all is well, if you don’t then the lender has the option to engage the provisions of the mortgage.

With so many foreclosures happening today, the market is experiencing many people who can’t pay for their properties and are asking the lender if they would be willing to accept a lesser amount than what they are owed. Many lenders are agreeing to this because they don’t want another foreclosure on their books. In reality, they figure it is the lesser of the two evils, foreclosing and having the property sit on the market for many months, or taking a lesser amount from a willing buyer and clearing their books, with a lose.

So what are the ramifications of accepting a short sale, for the lender and for the seller? In most cases the seller will take a hit on their credit report, not as bad as what a foreclosure would produce, but still a hit. The lender of course has come up short and this will be reflected on their balance sheet. There is another factor we must consider though, one that affects the innocent, you and I. Now I know you are wondering, “How could someone who sells their property at a short, how could it possibly affect you and me? The value of our property is based on the market sales of other properties surrounding us. A few years ago when properties where being bought for one price and within six months, (or less in some cases) being flipped for a much higher price this was driving the values of other properties up. Today we are experiencing just the opposite. When a property sells for less, then that too is establishing a level of value for not only the subject property, but for our properties as well. Short sales and foreclosures are the reason we are all seeing our property values fall.

Short sales are nothing more then the lender agreeing to a lesser price for the property. It is simply a remedy to an already bad situation. As we continue to see our unemployment numbers rise we will continue to see more and more short sales and foreclosures. The next time you and I decide to have our properties appraised, we will no doubt be shocked at our value.

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