While “selling short” has been a common practice in stock investing for years, just about no one was talking about a “short sale” in relation to homes or commercial properties until recent years.
But, now, it’s regular content in newspapers and magazines. There are countless real estate investing classes and seminars teaching how to capitalize on short sales. A whole niche has developed around the concept of “short sale”.
What is a “short sale”? And, why would a homeowner facing foreclosure care?
A real estate “short sale” (or “short refinance”) can be a useful tool for a lender and a homeowner when a home foreclosure is a worst-case outcome.
A “short sale” is the acceptance by the lender of less than the full payoff of a loan…when the property is being sold to a third party. The loan will be considered to be paid in full upon acceptance of a “short sale”.
The lender may choose to accept this course of action to at least get a portion of the mortgage loan paid back. If they foreclose on a home, the property may not sell at auction…meaning they end up having to hold the foreclosed property in their already likely swelling REO (Real Estate Owned) inventory. Although, the property may sell at some point through an REO sale, it also may not. And, as it’s sitting vacant, it’s ripe for vandalism and general deterioration.
The more distressed assets the lender holds, the less they can loan out in new loans…and they risk unwanted attention by the FDIC due to their swelling distressed REO inventory.
Why would a homeowner choose to go the “short sale” route? If all you’ve been trying to do to save your home isn’t working…and your Trustee Sale date is approaching, you may decide it’s better to do a “short sale” than to go into foreclosure.
Either way, sadly, you lose your home. But, with a short sale, you’re now back in control about what happens. And, the impact to your credit report is much less severe.
You might being saying now that you’re so fed up, you don’t care about your credit score. 18-months to two years from now when you’ve built yourself back up, you may be delighted you chose the “short sale” earlier because you should now be able to finance a home loan.
If you let the foreclosure happen, you may regret it for 10 years.
Beware that there may be tax consequences related to doing a “short sale”. SCO recommends that you talk with your attorney, CPA, etc., to determine what makes most sense for your particular situation.