In real estate, a short sale refers to the act of selling property for less than the amount still owed to the lender. When a homeowner struggles to pay their monthly mortgage, he or she may consider a short sale as an alternative to foreclosure. Another instance in which short sales are used is when the home's value drops significantly below market rates. Regardless, the lender only recoups some of their loaned money. To learn more about what is a short sale and how they work, keep reading.

 

What is a Short Sale in Real Estate?

 

The Basics of Short Sales

In a perfect world, homeowners would be able to pay their mortgage on time every month. However, unforeseen circumstances may arise that can prevent a homeowner from paying his or her mortgage, including being laid off from work, medical emergencies, car repairs, etc. When financial hardship occurs, the homeowner may seek either a short sale or foreclosure, which according to BankRate, accounted for approximately 45% to 50% of all real estate sales in February.

In the most basic sense, a short sale is the sale of real estate in which the proceeds generated fall short of satisfying the amount owed to the mortgage lender. If you currently owe $160,000 on your home, for instance, you may "short sell" it for $120,000. The $120,000 goes to the lender (minus closing costs and selling fees), but that's still $40,000 less than the amount still owed.

Short Sale Considerations

It's important to note that the homeowner is still responsible for paying back the monetary deficiency of a short sell. Using the same example mentioned above, short selling a home for $120,000 when you owe $160,000 creates a $40,000 deficiency. This $40,000 isn't forgiven; rather, it's debt that the homeowner owes to the mortgage lender. Furthermore, short sales must be approved by the mortgage lender. If the lender doesn't approve of a proposed short sale, it won't proceed.

Benefits of Buying a Short Sale Home

Of course, there are several benefits of buying a short sale home, one of which is the chance to score a property for a bargain price. Homeowners who short sell their homes are usually underwater or otherwise facing financial hardship. Therefore, they'll usually accept a lower-than-market price. And even if the price isn't within your preferred budget, you can often negotiate it down.

You also don't have to deal with homeowners who continue to reside in the home with a short sale. With foreclosures, some homeowners will continue living in the home until they are evicted. Short sales, however, are a mutual agreement between the homeowner and mortgage lender, so homeowners usually leave when requested.

This article was brought to you by Premier Island Properties - A full service real estate firm serving Hilton Head Island and Bluffton, South Carolina. For more real estate news, information, and interesting facts about the Lowcountry, please visit our website.