The most frequent way used to work out a settlement between lenders and borrowers in real estate is the short sale. In this type of transaction, the borrower wants to sell the property, and satisfy the majority of debt to the lender. However, since his mortgage amount exceeds the amount that can be realized from the sale of the property, it is referred to as a “short” sale.
When property is in foreclosure and a loan modification isn’t on the horizon, a short sale may be the most efficient way to solve the problem. Often, federal regulations give the borrower a release of liability on the remainder of the debt, once the short sale is approved by the lender and a closing occurs. Of course, the lender has to accept less than the full amount of the debt; in this sense, the sale is “short” to him.
Here’s an example. Suppose you own a property worth $100,000 and the debt on the property is $120,000. In this case, if the property sells for $100,000 and selling expenses are 10%, only $90,000 will be realized to pay off the lender, who is owed $120,000. Of course, the practical lender will weigh his alternatives: is receiving $90,000 better than receiving nothing in the short-term and going into foreclosure? Clearly sometimes the best choice is to accept the short sale.
Just as is true with a deed in lieu of foreclosure, these transactions can be complicated by second mortgages, judgment liens, homeowner’s association liens, and other impediments to conveying a clear title. In addition, beyond the problems with liens, there may be repairs needed to the home, which means the property sells for even less. Still, in all of these cases, the lender will benefit from a short sale, as a “bird in the hand” is better than waiting for a very uncertain price at a foreclosure sale down the road.
When clients want a mortgage modification, they are faced with an uncertain future: if the lender does not approve the modification, they may not be able to hold onto the property. It these cases, sometimes a short sale can be very useful. The property is sold, and the lender is paid something. The debtor often gets a release on the debt. In this way he can avoid having to file bankruptcy, with the ensuing credit report damage.
Short sales are becoming more and more popular in the current economy, as mortgage modifications do not always work to get relief for the borrower. In these cases, a short sale can be a great advantage to resolve the situation. Obviously, in working with an attorney for mortgage modification, you want to make sure that he is familiar with short sales, and works with them on a regular basis. I personally have found them to be a highly effective tool, giving more options to the overburdened borrower.