What is a Short Sale in Real Estate?

If you are behind on your mortgage payments, you may have heard of a short sale as an alternative to foreclosure. Before you list your home for sale, be sure you understand what a real estate short sale means for you and your financial future.

What is a Short Sale in Real Estate?

A short sale in real estate happens when the property is sold for less than the balance of the mortgage owed. In other words, the money comes up “short” when trying to pay off the outstanding debts on the home. According to Realtor.com, approximately 5% of all single-family home sales (including condos) are short sales. They are most common when property values are declining (like what happened in the Great Recession), when the home requires substantial repairs (including after a natural disaster without insurance), or when the homeowner faces unexpected financial hardships that make their mortgage payments unaffordable.

Short Sale vs Foreclosure

Few homeowners want to sell their home at a loss. But a short sale of a home can be used as an alternative to foreclosure. The difference has to do with who controls the sale of the property. In a foreclosure, the bank or mortgage lender uses a legal process to take control of the home and then sells it (often at auction) to recoup its losses on the unpaid loan. The homeowner often stays in the home during the foreclosure process and even the redemption process, and in some cases, can cause significant damage or neglected maintenance before they are evicted from the property.

In a short sale, the property is still sold, but the homeowner controls the listing, asking price, and offers accepted on the property. After the offer is accepted, the seller uses the funds to pay off the debt, but with the pre-approval of the lender that it will forgive the balance of the debt. Lenders often encourage borrowers who fall behind to use a short sale because it is a less expensive process for them and because the seller is more likely to maintain the home if they are in charge of the sale.

Understanding the Short Sale Process

Step 1: Talk to a Real Estate Attorney

If you are considering selling your home in a short sale, you should talk to a real estate attorney first to be sure you understand the process, and your options. This is especially important if a lender is putting pressure on the borrower to sell, since their interests may not be the same.

Step 2: Identify Each Lender and Lien Holder

To determine if a short sale is the best option, you need a clear picture of every person, company, and lender who is entitled to a share of the sale. If you have faced credit card collections, gone through a divorce, or have taken out a second mortgage or home equity loan, all those debts will need to be considered before listing the home for sale. Since no equity is usually realized from a short sale, it may be better to simply “walk away” from the property, thereby saving the time and expense of a short sale, and consider filing Chapter 7 bankruptcy instead.

Step 3: Contact Your Lenders

You may be resistant to telling your mortgage lender you can’t pay your debts. But contacting your lender early is the best way to open the door to negotiations and avoid foreclosure. Your lender will need to agree to a short sale if you want them to accept less than the full amount owed. Often, you will need to provide documentation of your financial hardship such as employment termination letters, unpaid medical bills, or a divorce decree to qualify for mortgage forgiveness through a short sale.

Step 4: List the Property for Sale

Next, you should work with a real estate professional to determine the correct listing price and market the property for sale. Be aware that some buyers avoid short sales because closing takes longer than in a traditional sale. The home may also sell below market value due to the additional red tape and the fact that the property is usually sold “as is.”

Step 5: Submit Offers for Short Sale to the Lender

Once you have an acceptable offer on the property, you will need to submit that offer to the lender for approval. It can take 3 to 6 months for the bank to approve the short sale. If the lender does not agree to discharge the loan balance, any short sale would then require you to bring cash to the “table”, since the balance on the mortgage loan would then have to be paid at closing.

Step 5: Closing and Mortgage Satisfaction

Once the lender approves the sale, the buyer and seller can proceed to closing. The real estate closing attorney will review all the paperwork, including the lender-required documentation, and arrange for payment to the various lenders and creditors in the proper order. If your lender does not agree to a discharge, you will need to make arrangements to pay the deficiency. Otherwise, your lender could sue you for the difference.

Alternatives to Short Sale of a Home

If you don’t want to lose your home to a short sale, a real estate attorney may be able to help you identify alternatives. Because lenders will sometimes accept a loss, you may be able to negotiate a loan modification, including early in the foreclosure process, adjusting the monthly payment and duration of your mortgage. If the market is declining, they may also be willing to lower the interest rate, which will lower the monthly payment as well. Sometimes, the lender may forgive a part of the unpaid balance based on the current market value of the property.

If you are willing to walk away but don’t want a foreclosure on your record, you can also negotiate a “deed in lieu of foreclosure.” In this arrangement, you turn over the title to your home in exchange for the cancellation of your mortgage. This is much simpler than a short sale, but sometimes the lender will require the borrower to have tried to sell the property before turning it over. The differences between these options demonstrate how important it is to work with a real estate attorney who represents you, not the bank, to find the solution that is best for you.

At Lawrence & Jurkiewicz, we can help you understand the Connecticut short sale process and make the most of negotiations with your bank. Through preparation, advocacy, and diligence, we help clients in Hartford and Litchfield Counties find resolutions to their unpaid mortgage balances. We will work with you to reach an outcome that aligns with your priorities and protects your property. Please call 860-626-1333 or contact us for a consultation.