There are two questions I have been hearing a lot lately.  The first is “what is a short sale?”  It’s usually followed up by “how does it work?”  The answers depend on who you talk to and which side of the transaction you are on – whether you are a buyer or a seller.  First, let’s take a look at it from the seller’s perspective.

 There are a couple of different answers to the short sale question.  The most basic answer is that a short sale is when a homeowner sells their home for less than what they owe to the bank.  The catch is that the bank has to agree to take less than they are owed.  That may sound impossible, but it’s not.  In fact, many banks are very willing to short sell a home under the right circumstances.

 One of the best things about the short sale is that, if it is done right, it will postpone foreclosure.  I have helped many families stay in their homes much longer than they ever thought they would by taking them through the short sale process.  Plus, it’s a much smaller ding on your credit to have a short sale instead of a foreclosure.  Many people are able to qualify for a mortgage in as little as two years after going through a short sale.

 First you have to be behind on your mortgage payments.  If you’re not, your bank won’t even talk about a short sale.  Second, there must be a good reason for being behind on your mortgage.  You must be in financial distress.  Maybe you are on the verge of bankruptcy.  You could have lost your job, or been through a catastrophic illness.  There are so many ways to get into financial distress.  The bank will need to see proof that you are in financial distress.  They will ask to see bank statements, tax returns, and if you are self-employed, they will want to see a profit-and-loss statement.

 There are also different types of short sales, depending which type of mortgage you have.  I won’t go into detail about each type here, but they are very similar.  Most banks want you to stay in the home until it’s sold.  In fact, they will require it.  That’s because your home will most likely fare better with someone living in it than if it is empty.  Once houses sit empty for a few months with no one taking care of them, they start to go downhill fast.  The bank wants to take care of their investment. In some cases, they bank will even help with your moving costs.

 The biggest factor in making all of this work is finding a realtor that knows what they are doing.  Short sales are relatively new to most realtors, and many realtors don’t like to deal with them.  It’s a lot of work for a realtor to sell a home through the short sale process.  Staying in contact with the bank and their negotiator is a time-consuming process.  A lot of realtors would prefer spending that time working on a much simpler transaction, like a standard home sale or purchase.

 If you are going to short sell your home, my advice would be to find a realtor who has been through the short sale process several times.  Ask if they have someone who is dedicated to the short sale process on a full-time basis.  If this is something they do once in a while or something they try every now and then, you should probably find someone else.  This is a completely different type of transaction from what most realtors are used to dealing with.  You need an expert who is experienced in dealing with short sales.

 On the buying side of a short sale, the most important things to have are patience and a good realtor.  If you need to be in a home in 30 days, this is probably not the deal for you.  I have done deals in 30 days, but those are the exception to the rule.  Most take a minimum of 60 days, with some taking as long as 6 months.  The upside is that if you can wait, you can usually get a great deal on a home.  Many homes that are involved in short sales sell for well below market.  It all depends on the bank and the loan payoff.

 Again, I would suggest that you find a realtor who has been through short sale process from the buying end.  There are additional forms and disclosures required in a short sale, so you need a buyer’s agent that is familiar with the process.  You’ll also need a pre-approval letter from you lender if you a getting a mortgage.  In many cases, a pre-qualification letter will not be sufficient.  For a bank to approve a short sale, they want to make sure that the deal isn’t going to fall through because the buyer couldn’t get a loan.  Talk with a lender ahead of time and get them the information they need to get you approved.  If you are paying cash, be ready to provide “proof of funds”.  That means they will need to see a banks statement that shows you have the money sitting in an account, ready to go.

 I have had buyers ask me if they could assume the mortgage.  My advice would be not to go that route, and here’s why.  If a seller has still owes $500,000 on their mortgage, the bank is going to take less than that in a short sale situation, sometimes a lot less.  Why would you assume the mortgage?  That means that you are assuming ALL of the debt, in this case $500,000.  You can get a better deal by buying through the short sale process and getting a new mortgage for less than the original mortgage.  You could save tens of thousands of dollars.  We recently helped a client short sell his home.  He still owed over $400,000, and the home sold for $300,000.  If the buyer had assumed the loan, he would have paid an extra $100,000 in principal alone.

 In summary, a short sale can be advantageous for everyone involved.  My advice is to make sure you are dealing with professionals who are experienced in the short sale process.