Downsides of Real Estate Short Sales

It sounds too good to be true - your mortgage lender tells you they will accept less money than you owe from your home sale to help you avoid going to foreclosure. This agreement is known as a short sale - also known as short-sale or shorted sale. Under certain conditions, the lender will accept a payoff less than you owe and will release the secured lien. For example, you may owe $150,000 on your note, but your home is appraised at $125,000 because of a down turn in the real estate market. You may be having problems keeping up with your mortgage payments because you just lost your job. You lender may agree to accept $125,000 from the sale of your house as payment in full to release your lien. Wow, you think you just saved $25,000 and are now out of trouble - no foreclosure and no more house payment. Before you get too excited, check with your lawyer, your CPA or tax accountant, and a realtor who has a lot of experience with real estate short sales. A short sale may, in fact, be the best solution for you, but it could also come back to bite you.

WHY LENDERS AGREE TO SHORT SALES

Mortgage companies and banks sometimes agree to short sales because when a property is foreclosed, the loan becomes a "non-performing" loan on the accounting books. Non-performing loans may affect how much the bank can get from the Federal Reserve in order to lend money to other people and make more profits. Often times, the lender can make more money on a short sale than on a foreclosure even though they don't get the full pay off amount on your loan. Not all lenders will accept a short sale and there are possible downsides for you.

WHAT LENDERS AND REALTORS MAY NOT TELL YOU

* A lender may release your secured lien for less than you owe, but they have the right to collect the remaining amount of the original loan. In the earlier example, if your lender accepts $125,000 for your $150,000 secured note, they can still seek a judgement against you for the remaining $25,000 debt.