Feb 28 2008
What is a Short Sale
A short sale is when the seller owes more money to the lender than will be realized from the sale of the property. How does it happen?
I will use a hypothetical example. Owners Jim and Jasmine Smith purchased their home two years ago, in 2006, when the market was hot. They paid $400,000 for their home. They put down $20,000- and paid cash for all their closing cost. When the transaction closed, they had $20,000 equity.
Fast forward to today. They want to sell their home, but don’t know if they can afford to. They are afraid they owe more than their house is worth. Let’s take a look around the neighborhood, to see what their home is worth.
They have a neighbor, Mr. Jones, who has had his house on the market for the last 6 months. His home is exactly the same as the Smith’s home. He initially listed his home for $400,000, but has not had any showings and no offers. After three months, his agent recommended he lower the price to $380,000. Still no showings and no offers. Mr Jone’s is getting desperate, and needs to move in three months. He decided to lower the price again,to $360,000, hoping to get some showings and some offers. Two weeks later, Mr. Jones receives an offer for $350,000. He accepts the offer.
How does this affect the Smiths?
The market price for their home has now dropped from $400,000 to $350,000. They no longer have any equity in their home; they owe more than their home is worth. In other words, if they sold their home for $350,000, at closing they would be ’short’. They would have to bring cash to closing, or negotiate with their lender to ‘forgive’ some of the loan.