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Sunday, November 28, 2010

So what is a short sale?

I can't tell you how many times people have asked me, "What's a short sale?"  It was a term that was rarely used 5 years ago and yet, my quick scan of the MLS would indicate that there have been, at very least, 330 short sales on the North Shore in the last 12 months.  So what is a short sale?  Quite simply, the sale price is less than the mortgage due on the house.

House sold in 2005 for $1M, buyer borrowed 80% (LTV) or $800,000 and owes about $795,000 today.  The house comes on the market in 2010 and is listed for $850,000, but sells for $775,000.   To pay off the mortgage and cover the deficiency, the seller would need to bring to the closing table, $20K. 

There are probably a lot of homes on the North Shore -- particularly people who bought or refinanced in the 2004-2006 time frame - where the loan amount is greater than the market value of the home.  It's not a significant problem, unless the owner needs to sell the home and doesn't have the financial resources to cover the deficiency.  That's when things get sticky, because the lender needs to get involved.  

The process of foreclosing on a property is both lengthy and costly.  For many lenders, a short sale is preferred solution.  Both the seller and the lender need to consent to the short sale process.  It allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers.  One thing to keep in mind.  Agreeing to a short sale,  does not necessarily release the borrower from the obligation to pay the remaining balance of the loan.

If you find yourself in this situation and you need to sell your home, personally I would recommend that you hire an attorney with LOTS of experience dealing with short sales.  There are a number of excellent lawyers in our market who have gone through this and can help streamline the process for you. 

Here are a few other resources that might assist you in moving forward with a short sale:

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