Short sales occur when a property gets sold for less than is owed on it. They are called "short sales" because the proceeds of the sale come up short. Short sales are usually negotiated with lenders in advance and typically are conducted in lieu of having a property go through foreclosure. Avoiding foreclosure with a short sale brings many benefits for sellers.
When you go into foreclosure, it is usually because you haven't been making payments on your mortgage. Short sales usually take some time since you have to prepare them, list them, find a buyer, get bank approval, and close the transaction. This can add up to months in which you get to live in your home without having to make your mortgage payment. This period can be an excellent opportunity to build up a rainy day fund so that you can stay out of financial trouble in the future.
Losing your home for financial reasons can be a psychologically draining experience. One benefit of a short sale is that it brings a sense of closure to your home ownership. As you go through the process, you have time to adjust to your new financial reality and you get clear date at which you will have to leave the home.
A short sale can give you an opportunity to stay in your home if you can find an investor who is willing to structure a leaseback transaction. In these deals, an investor buys the home at a discount at a short sale and immediately leases it back to you, usually at a lower payment. Many leasebacks even have a buy-back option that allows the tenant to buy his home back from the investor.
When you do a short sale, you avoid having your house foreclosed upon. This can help to minimize the damage to your credit. However, the late and missed payments that lead up to the short sale will still go on your credit report, so it will not be completely unblemished. Nevertheless, avoiding a foreclosure is still laudable.
Potentially Avoiding Deficiency Judgments
In many states, you can still be held liable for the amount of money that you owe the bank after the foreclosure. For example, if you have a $200,000 mortgage and your house sells for $40,000 at a short sale, the bank could get a deficiency judgment from a court and pursue you for it. It is possible to negotiate a release with the bank as a part of your short sale by which it agrees not to pursue you for any deficiency. In the long run, this could be the biggest benefit of pursuing a short sale.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.