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What is Real Estate Short Selling?

Updated on January 27, 2010

A short sale in real estate can be an uncomfortable situation. However, it is still a better alternative to foreclosure or bankruptcy. The advantage of a short sale is that it will not destroy credit as entirely or cause great embarrassment to the homeowner’s family.  

A short sale is one in which the bank or lender agrees to accept less than what is due on the property and consider the homeowner’s debt paid. This usually happens when the owner sells the home for less than is owed to the lender. Not all lenders will offer this option, especially if foreclosing is a better deal financially for the lender. You can ask the lender to not report adverse credit to credit agencies, but the lender is not obligated to comply with this request. 

The Real Value of a Short Sale

While it seems that buyers in short sale transactions may benefit from a lowered price on a home, this is not necessarily the case. In many cases, the seller paid too much for the home in the first place, or the market has dropped drastically since the seller bought the house. In this case, a house that you buy on short sale for $90,000 may be worth only that—not the $120,000 that the seller originally paid when the market was better. You are not necessarily saving $30,000 in the deal.

Unfortunately, some real estate agents attempt to push sellers into a short sale who really do not qualify for one. In order to qualify for a short sale in most states, the following conditions must be met:

1. Housing prices have dropped in the seller’s area. When this happens, the seller may owe more on the house than it is actually now worth. The seller won’t be able to sell the house for enough to cover the original cost, so a short sale is a reasonable alternative.

2. The seller’s mortgage is in default, or approaching default. The seller’s mortgage does not necessarily have to already be in default to qualify for a short sale. If the seller loses his job or other factors such as divorce or medical troubles come into play that point toward future mortgage default, the lender may be eager to prevent future disasters.

3. The seller does not have assets to repay what is owed. If a seller requests a short sale, the lender will examine the seller’s financial documents for assets available to pay off the debt. If the seller has significant assets, he may be ineligible for a short sale.

Image Credit: griffithchris, Flickr

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