What is a short sale?

A short sale is when a property is sold and nets less than what is owed to the lender. The bank not only takes less than what is actually owed to them, but may also pay the sellers costs to sell the property (excise taxes, escrow fees, title insurance and even the Realtor’s commission). Short sales occur when the market value of a property has dropped to less than the loan amount due on the property, or where the price the property can sell for plus the sellers closing costs exceeds any equity in the property. The seller would walk away with no proceeds in a short sale. In fact, banks often impose a deficiency judgment on the sellers who are required to pay back the funds owed above and beyond what they receive out of the proceeds of the sale. If they cannot agree to a deficiency judgment, the short sale will often not proceed. Furthermore, prior to considering engaging in a short sale, it is highly recommended that sellers consult with the lender as well as a competent tax advisor, as the short sale and loan forbearance may, depending on the type of loan involved, trigger unanticipated income tax consequences if the forgiveness is treated under federal or state tax laws as 'income' for that year.

Have you noticed that homes that are listed as a short sale are often priced lower than comparable homes in the neighborhood? Who is setting the price on these homes? While many buyers think the bank is setting the price, in fact, it is the listing agent. These Realtors have analyzed the market and selected what they believe will be a price to sell. If agents do not garner an offer within a few weeks, they will often lower the price since they must attempt to sell the home in a timely manner or the home goes into foreclosure and is taken off the market in preparation for that. The Realtor's goal is to get a number of offers in queue since in the greater Seattle area, up to 85% of short sales fail to close. Either the bank will not accept the offer the buyer makes (even if full price or over full price) or the buyer gets frustrated with the lack of response from the bank and walks away. It is typical for a short sale to take 9 months to process. By then, many buyers have found another home and moved on.