So what exactly is a “Short Sale?”
There’s really nothing mysterious about this phrase. A “Short Sale” is simply a sale where the sales proceeds are “short” of the amount needed to pay off the loan.
The concept is actually quite simple. If a house is worth more than the loan against it, then the borrower can sell the property at any time, pay the lender the amount due on the loan, pay the closing costs and commissions, and pocket the rest.
But what happens when the house is worth less than the amount of the loans against it? There’s not enough to pay off the lenders, the commissions, and the closing costs. So how can a house sell if there’s not even enough to pay off the lenders?
In a “Short Sale,” either one or both of the lenders will often agree to accept less than the amount due on their loan. Therefore, the sales price is “short” of what would otherwise be needed to pay off the loan.
So why would a lender agree to accept less than the amount due? There can be good reasons.
If the lenders won’t agree to accept less than the amount due, then the property will probably end up in foreclosure. And foreclosure sales prices can sometimes be 20 or 30 percent less than fair market value. If the lender can get fair market value, then the lender can actually end up with more money in their pocket than if the property goes to a foreclosure sale. This explains why a senior, or first, lender will often allow some of the sales proceeds to go to the second lender, even if the first lender will not be paid off in full.
Nothing obligates a lender to accept a “short” sales price. And if the lender thinks the sales price is too low, then such a lender will sometimes refuse to approve a short sale. But these days, many short sales prices are being approved by the lenders, and short sales are still being done in large numbers.