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What is a Short Sale in Real Estate?

Demystifying Real Estate: What is a Shortsale?
Speaker 1:
What is a short sale? I’ll tell you right after this.

Okay. A short sale does not mean a quick sale. It has nothing to do with the length of time. A short sale refers to a transaction, a real estate transaction, where the proceeds of the sale do not pay off the liens that are on the home. Now, a homeowner or a home seller might have one lien, they might have two liens. And by liens, I’m referring to a mortgage. You could have a first mortgage, you could have a second mortgage. You could have a HELOC on the home. What’s all the debt that is against the house? That’s what we’re referring to when we talk about liens. So when a home sells, the proceeds of the sale, typically will wipe out all of those liens or all of that debt. And then the home seller gets whatever is left over. We refer to that as the net proceeds for the seller. After all is said and done, and all of the liens are cleared out, how much money does the seller get?

Well in a short sale, the price that the home is selling for does not cover all of the debt that’s on the home. So imagine that there’s a $500,000 mortgage on the home, $500,000 worth of debt that needs to be wiped out with the sale of the home. But the home’s only selling for 400,000. If that’s the scenario, we have a problem because we only have $400,000 to work with. And $500,000 worth of debt. Very simple math would say that’s $100,000 of shortfall that we have. And that shortfall is where we get the term short sale. We are short of what the seller owes in helping them clear off all of their debt. Of course, the math gets a little bit more complicated because there’s the cost of selling, which also has to be paid for, with the net proceeds, but bottom line, whatever the house is selling for does not clear out all of the debt that the seller has on the home.

In this short sales scenario, we need bank approval to accept the transaction and to accept the sales number. It’s funny because short sales, despite their name are actually long sales. The transaction for a short sale takes a lot longer to complete and to close than a regular transaction. And the reason for this is that there’s so many hoops to jump through in order to get a bank that is owed a certain amount of money to accept less than what they’re owed. There’s a ton of paperwork. There’s a ton of approval that needs to happen within the bank. And sometimes at the end of the day, even if you have a buyer that’s viable and willing to write a check, write cash, otherwise a very simple transaction, in the end, the bank might decide that it’s not in their best interest to accept this transaction or to allow it to go forward. And they might just say no.

They might say that, hey, the number needs to be higher in order to pay off more of this debt, that’s owed to them. However, no matter the details involved in a short sale, it takes a long time. It’s not fun for the seller, especially, and it’s definitely not a sure thing for the buyer if they are interested in purchasing that property. I hope you found this helpful. I could go into story after story about various short sale transactions I worked on in the great recession, 2008 to 2011 roughly, however, we will save that for another video. We’ll catch you on the next one. Thanks so much for watching.
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