What is a Short Sale?

I wish "short sale" meant a very short escrow, but unfortunately, the short sale can drag on for months! Also known as a pre-foreclosure, a short sale is when a property is sold by the homeowner for less than what is owed to the bank. The lender must agree to a short loan payoff before a sale can go through. A short sale property is often listed for sale after the lender has filed a Notice of Default and the homeowner is trying to avoid foreclosure. Alternatively, a homeowner and his/her Realtor^® might start the process by contacting the lender when the homeowner begins having trouble making loan payments but has not yet missed one.

Short sales can be complicated and time consuming because there may be more than one lender involved, and all lenders must approve the price and the terms of the purchase offer. Since the lender with the first trust deed (the primary loan) usually has payback priority over those who hold the second or third loans (if any), the other lenders may not be in line to receive any money for a payoff. Sometimes the holder of the first trust deed will grant a small payoff to the holder of a second trust deed in order to complete a short sale.

Lenders stand to lose a substantial amount of money in a short sale. However, lenders may agree to a short payoff rather than going through foreclosure proceedings because it may cost them less and may be completed in a shorter time. Homeowners might prefer doing a short sale because it can be less damaging to their credit history than a full foreclosure.