Archive 2008 - 2019

What is a Short Sale?

by Peter Liffiton, P.E.

The simplest explanation is that a “Short Sale” results when a property owner must sell a property for less than the amount due on the mortgage loan. If the property owner has other funds and can pay down the mortgage principal such that the sale of the
property can cover the amount of the loan principal, then it is not a “Short Sale” per se, just a very distressed sale being made with a great deal of stress on the owner. However, if there is no way to pay off the amount of the mortgage principal due at the time of sale, then a true “Short Sale” is the only solution. In that instance, what usually happens is that the owner negotiates a sale at the best possible price but cannot commit to the sale without the agreement of the mortgage lender.

The mortgage lender, usually a bank, must consider all aspects of the sale including losing money on the loan (the unpaid portion of the principal due) against the likelihood of the owner defaulting on the loan and the bank having to foreclose on the property.

There are several consequences to a buyer of such a sale. First is the time delay in waiting for the bank to consider the offer and reach a decision to accept or reject the offer. Depending on the bank and their procedures, that process may take anywhere from a few days to a few weeks. Additionally, there is very little opportunity to re-negotiate if deficiencies are found during inspections since that would require the bank to go through their approval/rejection process all over again. The bank will
usually insist on language such as the property being sold “as is” which leaves no recourse back to the bank for anything after the sale is final. And finally, the lender will usually insist that the buyer, yes, the buyer, pay an “Administration Fee” for the Short Sale amounting to as much as $5000 over and above the selling price.

Can you buy a property at a lower price if it is a “Short Sale?” Usually, yes, but recognize that the buyer’s risk is much higher in a “Short Sale.” Working with a knowledgeable professional agent is always good advice, particularly with a Short Sale.

Peter Liffiton, P.E.
Registered Professional Engineer
Coldwell Banker Residential Brokerage
Medfield, MA 02052