Essentially, a short sale is when a homeowner in trouble sells their home for less than (or short of) the borrowed amount, with all proceeds going to the lender. That may not seem like a great idea, but short sales are one of the most popular alternatives to foreclosure. In some cases (but not all), the lender agrees to forgive the difference, giving the homeowner the ability to walk away with less credit damage.
How do I sell a short sale?
If you (owner) and your lender are out of options (like loan modification), then it’s time to convince your lender to agree to a short sale. They have no obligation to grant you one, so your best bet will be to show them that your inability to pay is the result of recent unforeseen circumstances, like losing a job or getting sick, etc. Most Lenders will be less forgiving in situations that could have been avoided.
Usually, you can submit your buyer’s offer and your request for a short sale (financial documentation included) all at once. This isn’t the time to try to do this alone. The process is complicated, so make sure you consult a Realtor and attorney that specialized in short sales.
Also keep in mind that while selling your home in a short sale has the potential to minimize damage, it won’t protect you completely. All of this, of course, will vary depending on your individual circumstances. For instance, if you’ve never missed a payment, then you’re going to be in better shape than someone who has. Also, how your lender or bank reports the short sale (“paid in full” vs “settled for less than full balance”) can impact your credit significantly.
How do I buy one?
Contradictory to a foreclosure or an REO (or real estate owned property), the bank has not yet taken possession of the home in a short sale, meaning that you will deal with the homeowners and their Realtor, like in a normal sale.
Once you’ve decided to buy, though, the process can be lengthy. Often, you will find yourself waiting on a lender’s approval, and you may have to prepare for some additional back and forth.
On the plus side, you may be able to get a good deal for your trouble. Many short sales are priced to sell quickly. Be aware, though, that some of the warning people give about foreclosures apply to short sales as well. If the seller doesn’t have the money to pay their mortgage, they probably haven’t had the money for repairs and upkeep. That means that you may still need to do a little bit of work