Ask The Expert

What is meant by the term “short sale”? I’ve heard this term used a lot lately with regard to the sale of homes, but I don’t understand it or how it could affect my purchase of a home.

“Short sale” or “short payoff” is used to refer to a situation where a home owner is trying to sell their property, but finds that they owe more to their lender than what the property is currently valued at in the marketplace. This is becoming all-too-common a situation in today’s market. Many people purchased homes in the past year or two, at the high (price) end of the market with no down payment, so they started off owning their home with no equity. This is not necessarily a bad way to buy property, it just doesn’t work out well if the market shifts and property values begin to decline, even slightly.

The homeowner can find themselves with not just zero equity, but actually negative equity, known as being “upside down” on their equity position or another term is “under water”. If the owner is not planning on moving, it’s not a huge problem and probably the best advice to the seller is if you’re upside down on equity, this is not the time to sell the property. However, if you have to move, or circumstances have changed and you can no longer afford to live in the home, then there aren’t too many choices. Selling is probably the only option. Yet, unless you have the resources to pay off the mortgage, you will need to begin by consulting your Realtor to get a realistic opinion of value and then talk to your lender about negotiating a “short sale”.

The lender will typically require that the seller provide ample documentation to show their financial position and see what options may be available to offset the shortfall (difference between the sale proceeds and settlement/payoff). The Realtor is invaluable in these situations because they can assist the seller to work out a negotiated payoff with their lender that releases the seller from ownership and helps to facilitate the purchase for a new buyer.

From the buyer’s perspective, all negotiations are contingent on being acceptable to the lien holder, or lender. So, again, the professional Realtor is invaluable in helping the buyer to write up the offer with all the proper contingencies and time lines written right into the sales agreement to protect the buyer’s and seller’s interests and facilitate a sale.

Barbara Cunningham

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