A real estate short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditor’s is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any defiencies of the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure, which mitigates additional fees and costs to the both the creditor and borrower. A short sale will often result in a negative credit report against the property owner, however it is less damaging than a foreclosure report.
The process of real estate short sales often creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency.
Creditors holding liens against real estate can include Primary Mortgages, Junior lien-holders – such as second mortgages, Home Equity Lines of Credit HELOC lenders, Home Owners Association HOA (special assessment liens) – allw who will need to approve indidivual applications for a short sale, should they be asked to take less than what is owed.
Most large creditors have special loss mitigation departments that evaluate borrowers’ applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independant evalauation of the property from a appraisal, a Broker Price Opinion (abbreviated BPO), or a Broker Opinion of Value (abbreviated BOV).
Depending on each Creditor’s policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures and other causes as part of the financial crisis of 2007–2011, many creditors have become adept to process such short sales applications, however it can still take several months for the process from start to finish, often requiring multiple levels of approval.