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Understanding Short Sales (And Why They Take So Long)

By Elizabeth R. Elstien

In the two decades before 2008, properties sold as short sales were few and far between. Today, they make up the bulk of home sales throughout the U.S. and Massachusetts is no exception. Here, we'll learn exactly what constitutes a short sale and reasons they take so very long to close.

What is a short sale?

A short sale means the value of the home has greatly declined since it was originally appraised and the owner's/seller's mortgage loan was approved. This means that, unlike with a conventional sale, the sale of the home in today's market will not pay off the owner's/seller's mortgage loan leaving the payoff of the mortgage short. Sometimes the seller has missed mortgage payments and wishes to sell before the home is foreclosed on and other times the seller simply needs to move for a new job or other reasons.

How does a short sale work?

As with a foreclosure sale, the lender is very much involved in a short sale. But the difference with a short sale is that the home has not been foreclosed on and the owner is selling the house and may be still living in it. Real estate agents representing each party deal with the contracts and negotiations, as in a conventional or foreclosure sale. The involvement of the lender (and the underwriter in many cases) makes three parties to the short-sale transaction.

Even though the owner is selling the house and signs all the contracts and addendums, everything has to be approved by the lender to meet the bottom line. The lender can alter the original buyer and seller contract sales price and terms so that it meets or exceeds the lender's bottom-line figure. If the buyer and seller don't agree to the new price and/or terms or negotiate a reasonable counteroffer within a set time, the deal may be over. As the seller is in a deficit, all money gained by the seller in the short sale goes to the lender to pay the mortgage.

Who is in charge of the short sale?

Short sales go smoother if the listing agent, who negotiates the sale with the lender, knows what the lender will accept as the lowest amount, along with any terms they won't accept, and forwards the information to the buyer's agent. Lowest amount means sales price minus seller's closing costs. The buyer's agent will only know what the seller's agent chooses to tell, so good communication is vital.

Why does a short sale take so long to close?

  • lenders are unable to keep up with the high volume of short sale transactions
  • the complexity of the short-sale process as opposed to a conventional or foreclosure sale
  • lenders and their underwriters make additional parties to consult in the sale transaction than in a conventional or foreclosure sale
  • lenders must assure a certain net dollar amount from each home sale
  • an inexperienced short-sale real estate agent on the seller's side can add to the time

Buyers must have patience and perseverance in a short sale. A buyer should go into a short sale with caution, knowing that she/he can back out at any time before the lender's final contract acceptance (unlike with other sale types).

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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