In the world of real estate, a short sale is simply an agreement by the lender to take less than what is owed on the house in order to make the sale. The caveat of a short sale is that the house must have declined in value, with what is owed on the property being more than what the house is currently worth.
This may seem like a bad business deal for the lender, since they are receiving a smaller amount than what was due to them, but there are reasons why short sales can make sense.
There are some properties that have been on the market for months or even years— the lender may be losing money if the loan is not being paid for and is headed for a foreclosure or bankruptcy.
The home may be in a soft real estate market or a neighborhood where demand for houses is low. It’s also possible that there are a limited amount of qualified homebuyers in a given period of time. Short sales help the lender get back at least some of the money that is owed to them through the purchasing process.
Sometimes getting the lender to agree to a short sale can be difficult— the seller must complete paperwork to prove financial hardship. Once the lender agrees to the short sale, then an appraisal must be completed. If the appraisal matches what the buyer is offering, then the process of closing the deal begins. In many cases, the lender will request that the buyer pays closing costs and any necessary repairs.
Foreclosures are different from short sales. In a foreclosure, the owner has stopped making payments for three to six months or more. The lender then takes legal possession of the property and sells it at auction. Purchasing a house through a foreclosure auction is a very different process from buying a short sale. In the end, short sales take more time, but they are great for buyers who are looking for a good deal on a property.