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Um, what is a short sale?
A short sale is generally when a seller cuts a deal with his or her mortgage lender to sell a home for less than the amount the seller owes on the loan for the house or condo. Here's some guidelines and scenarios on short sales from the federal government.
But! You don't have to be behind on your mortgage to enter a short sale (seriously—people forget that all the time).
So, it's not a foreclosure?
No, it's not. Most experts on the subject will tell you to think of a short sale as a pre-foreclosure option. It's an option that can be exercised by so-called upside-down homeowners, those who owe more on their homes than they can sell it for. It's a way to get rid of a house or a condo one can no longer afford (though it's an option, too, for those not behind on their mortgages).
And it's not necessarily about selling for less than what you paid?
No, not at all. Buying a $500,000 one-bedroom and selling it for $450,000 is not a short sale unless a side, the seller or the lender, gets "shorted." Otherwise, it's just selling for less than what you paid. A short sale is an arrangement that has to be entered into; it doesn't just happen.
O.K. So what's the short-seller get out of it?
It generally means the seller does not have to lose the home through a foreclosure; and the mortgage lender usually forgives the loan (we said "usually"—read on). Note: The Mortgage Debt Relief Act of 2007, which allowed taxpayers to exclude income from the discharge of debt on their primary residences, is no longer in effect; it expired at the end of 2012.
Well, then what does the lender get?
The lender escapes having to unload a foreclosed property.
By trading it to a buyer. See, short sales typically involve three parties: the distressed seller; the mortgage lender; and the buyer seeking a deal. Again, it's not just selling the home for less than what you paid; it's an arrangement where the seller or lender agrees to get shorted to get out of an upside-down property.
So the buyer gets a deal?
Is it win, win, win?
No. The seller's credit can be damaged through a short sale. The lender can be stuck with the property if the short sale doesn't go through. And the buyer often gets stuck with a property that needs some costly TLC. Plus, a short sale is a cumbersome, often-drawn-out process.
For instance, most lenders will not enter into a short sale unless the seller has somebody lined up. And! The short sale does not necessarily wipe away a seller's debt. The debt can follow a seller in the form of a promissory note and may have to be paid back in full. Also, things can get dicey.
The lender is trying to get as much money as possible; it's not just trying to escape having to deal with a foreclosed property. Lenders have been known to lean on sellers—who, remember, are stressed out to begin with, what with an upside-down property—to sign those promissory notes, committing to loan repayments over X amount of time.
And the seller is not just dealing with the lender; he or she is dealing with the investors often behind the lender, who have their own ideas about how much money might be gotten back from a short sale. Also, it's up to sellers to make sure the debt has been ultimately retired. They should never assume that the close of the short sale is the end.
How common are short sales in the Hub?
No idea. But the region and Massachusetts at large saw spikes in foreclosures following the Great Recession, suggesting that short sales were a much-discussed topic from roughly 2007 to 2011. The foreclosure numbers have dwindled of late, and the region has a notoriously healthy housing market (from seller and broker points of view, at least). Now you know, though.
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