How Do Short Sales Work?

St. Louis Real Estate Podcast with Sandie Hea

Short sales are a great way to get a good deal on a home purchase. However, this process doesn’t come without its own set of unique challenges.

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I get asked questions all the time about short sales. In truth, it’s a tall order to execute a short sale. However, it’s much more advantageous than a foreclosure. In a short sale, a home seller owes more on their house than what the home is worth currently.

When the market hit its highs from 2005 to 2007, home values peaked. People took out larger mortgages due to their equity, then used that money to pay off debts and buy more things. When the market crashed in 2008, they were stuck with homes that were valued much lower but still had very high mortgages. The Big Short, a movie on Netflix, will paint this historical picture perfectly.

Why would a bank allow a short sale? Although foreclosure seems more like the bank’s answer, it costs a pretty penny. They have to hire attorneys, clear the deed and hire an asset manager. Since the bank owns the property, they are in charge of paying for insurance, upkeep, utilities and more. Banks are in the business of making money - not in the business of taking “care” of houses. Most of the time, they will allow a short sale before a foreclosure.

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The bank is in the business of loaning money; they don’t want your house.

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As a buyer, a short sale does offer you a better deal than your typical home. But the question you have to ask yourself is, “Can I afford to wait three to six, maybe nine months to get the home?” The bank doesn’t hurry the short sale process along, so you could write a contract today and not have it agreed upon for up to nine months. There’s a potential bright side if you can wait - you’d probably receive 20% to 30% off of the market value of the house.

As a seller, a short sale is preferable to a foreclosure. It will ding your credit score, but not nearly as much as a foreclosure would. You could also buy another home three years removed from your short sale, but wouldn’t be able to buy for seven to 10 years after a foreclosure.

Short sales are a complex subject and something that can’t be covered in a single blog post. If you have any questions for me, don’t hesitate to give me a call or send me an email. I look forward to hearing from you.