A real estate short sale occurs when the amount realized on the sale of a property falls short of the amount outstanding on a loan secured by the property. A short sale is sometimes an alternative to bankruptcy or foreclosure.
Your first step if you want to explore this option should be to contact your lender and determine if a short sale is feasible, since not all lenders will consider them. If you are being advised by a lawyer, real estate agent or another professional on your short sale, you will need to send a letter to your lender authorizing it to deal directly with and provide information about you loan to your designated representative.
Among other things, your lender also may want: 1. A statement showing the estimated net cash expected to be realized from the property sale. This estimated closing statement should show the anticipated sale price for the property, all costs related to the sale, and the net cash expected to be paid to the lender. 2. Detailed information about your financial position, including your income from all sources, your job, and your assets, including bank and brokerage accounts and any other real estate and tangible assets you own. 3. A copy of the detailed purchase agreement once an agreement of sale is reached on the short sale property.
In addition, you may need to make a strong case to your lender as to why a short sale is in its best interest relative to other options like foreclosure or your personal bankruptcy.
There are pros and cons for you in choosing to do a short sale.
Two cons of a short sale are that:
1. It will damage your credit score, possibly as much as 200 points if you have a good score.
2. The lender may not forgive what is still owed on the loan after the short sale is completed and may expect you to pay the difference. Most lenders will ask you to sign a promissory note for the balance due on the loan as part of the short sale process, although you can try to arrange forgiveness of this amount when you negotiate the short sale with the lender.
Pros of a short sale are that:
1. You avoid foreclosure, which can be a stressful and prolonged process.
2. It is a proactive move that may allow your more control over the process of dealing with your loan.
3. Although your credit rating will take a hit, the damage may be less than with a foreclosure and you may be able to recover more quickly from it, especially if you keep you financial house in order following completion of the short sale.
4. You may owe nothing following completion of the short sale.
Any real estate transaction can be complex and the legalese in real estate contracts can be difficult for the average person to understand. This is even truer with a transaction like a short sale. Therefore, it is a good idea to get advice from an objective professional, including a financial advisor, before and during the process to ensure that it is handled properly, that you understand the implications of the transaction and that your interests are protected.
homebuying.about.com, Short Sale in Real Estate – How to Handle a Short Sale in Real Estate
www.smartmoney.com, Real Estate Short Sales: The Shortcomings at SmartMoney.com
eshortsales.net, Short Sale Pros and Cons