The term “short sale” is being heard with increased frequency in the current real estate market and many consumers are confusing this term to mean a “quick sale,” which it is not!
As a point of information, a short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property. Furthermore, the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Thus, the funds received from the sale are “short” of the payoffs and the term “short sale” arises.
This is not a new issue that has just arisen from the current recession, it has only grown more common given recent declines in property values since the financial crisis began in 2008. As property values declined, homeowners’ equity began to erode. When a sale became necessary, many homeowners had no equity remaining in their properties, particularly ones that were bought at the height of the real estate boom of 2005-2007, when prices were at their highest. Many other homeowners refinanced their properties during this period, taking out the equity at that time and today have little or no remaining equity.
The short sale only becomes necessary when the owner does not have the funds to make up the difference. This remaining unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
For a prospective buyer, purchasing a “short sale” property may mean they get the home of their dreams for much less than it last sold for or what it was valued at a few years ago. However, to execute a short sale from contract to close is often not a quick process and requires a level of patience and diligence by both the buyer and seller.