What Is A Short Sale? How Do Short Sales Work?
The term Short Sale has become increasingly too familiar in today’s modern vocabulary due to the down turn in the real estate market. You most likely will not find a definition of Short Sale as it is used today in the latest printed editions of the Merriam-Webster, Oxford English, American Heritage or Webster Dictionaries. The reading of the online Webster Dictionary definition, origin 1865 - 1870: “sale of securities or commodity futures not owned by the seller (who hopes to buy them back at a lower price) provides insight as to the traditional meaning of the term. Dictionary.com defines Short Sale as a noun: “an act or instance of selling short”. Although Banks and Lenders understood and rarely utilized the concept, this definition is more in line with the term’s relevance in society today as it relates to real estate.
When an individual or business entity (Borrower) obtains financing (also known as a loan) from a Bank or Lender, the amount of money given is based upon not only the Borrower’s request for the amount of funds needed to purchase improved or unimproved
(vacant) real property, but it is also based upon the Bank or Lender’s parameters and/or policies to meet their loan to value percentage requirements.
This means the amount of the loan must equal a certain percentage of the value of the real property which is the collateral for the loan. The Bank or Lender will have the Borrower execute a Promissory Note (legal document setting forth the terms of the loan) and the Borrower will give a Mortgage to the Bank or Lender (legal document recorded in the public records which evidences a lien on the collateral pledged by the Borrower to secure the loan).
Prior to the decline in the values of real property, meeting the loan to value percentage requirement was not an issue in the relationship between the Borrower and the Bank or Lender. Due to the continued decline in the property values over the past few years, the Banks and Lenders are in a position where the values of the real property (the collateral) are substantially lower than the amount of indebtedness of the loan.
The Borrowers are in a worse position and are unfortunately faced with a perfect storm scenario: decline in the value of their real property with an inability to refinance or sell the home for the outstanding amount owed, while trying to exist in a depressed economy, coupled with their own personal hardship that has been caused by an unexpected event.
When the value of the collateral has decreased past the amount of the outstanding amount owed on the loan and the Borrower no longer can make the payments on the indebtedness, it is time to consider a loss mitigation option.
A Short Sale is considered one of the available loss mitigation options. A Short Sale is when the sale of real property (the collateral) will result in proceeds from the sale being less than the amount required to pay the Bank or Lender in full the total amount of the outstanding indebtedness owed. Once the Borrower realizes they are in such a situation, they request the Bank or Lender to accept the proceeds as a full payoff of the loan.
If you find yourself experiencing circumstances that are described in this blog, please call the Dellutri Law Group and speak with an individual who will be able to analyze your specific situation and determine if a Short Sale is the best option for you.
This Blog was written by Annette Giardina Haber, Esquire, of the Dellutri Law Group, P.A. Ms. Haber runs the Firm’s Real Estate Department and concentrates her practice as a real estate transaction attorney. She represents clients through loss mitigation options, drafts contracts, issues title insurance and handles residential and commercial closings.
