Real Estate 101 - What Is A Short Sale?

A short sale in real estate refers to a concept whereby a lender (mortgagee) agrees to discount the amount of money owed on the loan made to a borrower (mortgagor), due to hardship on the part of the borrower. It basically allows the homeowner (mortgagor) who owes money to the lender (mortgagee), to sell the home or condo for less than the amount owed to the lender.

The benefit to the mortgagee is that the lender gets to cut losses, which would be much greater if the lender is forced to foreclose on the property. The advantage to the homeowner (mortgagor) is that he/she gets to sell the property for less than he/she owes, avoids foreclosure, and the balance of the debt is forgiven. The advantage to the buyer is that he/she gets to buy the property on the cheap, so to speak. It seems like a win, win, win situation for everyone.

Ah, but we have often heard that all that glitters is not gold, so what is the problem? The problem is that the entire ordeal can be very frustrating, and often enough, an effort in futility. Why? The easiest part is making the deal between the buyer and the seller. The seller is eager to sell, thereby avoiding foreclosure, and the buyer is eager to buy the the home or condo at a great price.

They may come to an agreement as to price and terms, and execute a legally binding contract, but then the problems begin, because the deal must be presented to the lender, and the lender must agree to the price before a sale is made. The mortgagee's required agreement to the sale is listed on the contract as a contingency. Without the fulfillment of the contingency, there is no sale.

Long delays by the lender in responding to the contract for sale can be very frustrating for buyers and sellers. Buyers often walk away in frustration or even anger. Then there is the question of price. Banks and other lenders like to make money, but they can’t stomach losing it, so they often wont just agree to the price on the contract. Again a frustrated buyer may walk away, and the process has to begin anew. That is the long and short of a short sale.