Short Sales are the selling of real estate that proceeds from the property sale happens to be less than what is actually owed on the debt that are on the liens that are on the property. If all the lien holders happen to agree to accept an amount that is much less than what happens to be owed for the debt, then the sale of the property can happen. A Short sale isn’t to be confused with short settlements.
A short sale will have 2 main components. They will only be successful when the lien holder – the mortgage company – has agreed to take less than what is owed on the property note or debt which results in a sale that is below the appraised value for the property. The agreed upon sale price is defined to be less than or at the appraised value which allows the process to be done. A good buyer will not pay more than the appraised value, and a mortgage lender will not provide a mortgage for more than the appraised value, which limits the short sale proceeds to a maximum gross yield of the appraised value of the property.
It is vital that you understand that the lien holder isn’t bound to accept the appraised value and may demand a greater sale price. It is in this case, the sale with a good appraised value buyer will not longer be an attainable or reasonable expectation. The demand from lien holders for more than the appraised value, but it still being a less amount than what is owed on the debt is what is known as a short settlement. There are some lien holders that will agree to a short sale while demanding more than the appraised value. This is a paradox that is predestined for failure and is not achievable.
Thus, short sales can only be done whenever the lien holders are willing to take a less amount that what is actually owed while agreeing to a sale price that is below or at the appraised value for the whole property.
Creditors that have liens against real estate may include second mortgages, primary mortgages, homeowner association liens, IRS & state tax liens, mechanics liens, and home equity lines of credit will need to approve the sale in order to be paid less than the amount that is owed. The lien holders don’t have to agree to take less, but they often will because it is an alternative to letting the home or property go into foreclosure.
Short sales are more beneficial alternatives to foreclosures and have really become very common in the United States beginning in 2007 during the real estate recession. Other countries have very similar procedures. In the United Kingdom the process is called Assisted Voluntary Sale. While both foreclosures and short sales will result in a negative credit remark on your credit report, simply because the owner was acting responsibly and proactive by selling short, the impact on the credit report is a lot less.