What is a “short sale” and will it help me?
This is a question I get asked a lot. Let me explain what a short sale is, and then we can discuss if it could be an option for you. So, that is a short sale in a nut shell. Is it right for you? I don't know. There are other advantages and some consequences of a short sale beyond the scope of this blog. Each situation is unique and must be looked at individually, but let's look at the basic concept.
Let's start with a traditional sale. A homeowner has a house worth $125,000.00. There is a mortgage on the property with a balance of $90,000.00. Homeowner wants to sell his/her house and enters into a contract with a realtor to sell the property. The realtor agrees, and the contract provides for the standard commission rate of 6%. Of course, in order to sell the property, the homeowner must pay off the mortgage. After a couple of weeks, the homeowner receives an offer on their property for $120,000.00. At the closing the homeowner will have to pay a number of expenses (from the sale proceeds). First, there is the realtor commission fee of $7,200.00, and a pro ration of the real estate taxes, attorney fees, recording fees and various closing costs. As a general rule, all of these costs, including the commission, are approximately 10% of the selling price. So, from the $120,000.00 sale price, $12,000.00 is paid in closing costs, the mortgage must be paid off ($90,000.00) leaving $18,000.00 left over for the homeowner.
So what a short sale means, simply put is there is not enough money to pay the expenses and pay off the mortgage, hence there is a shortage. It looks something like this. A homeowner (like most in this area) has a house worth $95,000.00, even though a few years ago it was worth a lot more. Let's assume the mortgage is the same as before with a balance of $90,000.00. Then homeowner lists the house with a realtor for $95,000.00 and receives an offer of $90,000.00. The closing costs will still be 10%, or in this case $9,000.00. Therefore, after expenses only $81,000.00 is left over. Since the mortgage balance is $90,000.00, there is not enough to pay off the mortgage. In a case like this, in order for the sale to take place, the mortgage company will have to agree to accept what is left (the $81,000.00) and take the mortgage lien off of the property.
So, will a short sale help me? The answer is maybe. If the vast majority of your debt is on a house and if resolving the house would put you in a situation where you can cover your bills, then yes; it is an option. However, most of our clients are in a position where they owe not only on a house but also on many other bills such as medical and credit cards. For these clients, even if they resolved the issue with their home, they would still need to file a bankruptcy. In situations like that, a number of factors have to be evaluated to determine if a short sale is a good option or not.
Last, while mortgage companies benefit from a short sale, they seem to be making it harder and harder. Often times mortgage companies are requiring that short sale offers allow the bank 30, 60, or even 90 days to respond. Most buyers will not make an offer that they know may stay open for 90 days and then potentially get told it was not accepted.