Some properties are subject to a short sale. A short sale is used when the proceeds from a sale will not cover the loan on the property. In order to close the deal, the lender agrees to “short” their loan, ie. take less than the full amount.

Fundamentally, lenders don’t like to do short sales. And, they are under no obligation to allow one. The lender must voluntarily agree. Currently, only an estimated 15-20% of all short sale requests are approved.

Typically, the seller participates in a short sale to avoid being foreclosed upon by the lender. Sellers take a big credit hit when they go through either a short sale or a foreclosure. But, a short sale allows the seller to get a future home loan quicker.

Buyers do short sales to get a property they want at a great price. The hope is that they can get the property below market price. But, short sales are neither quick nor easy.

The following are key questions to consider before pursing a short sale:

The lender has a loss mitigation department which deals with short sale requests. Each staffer has 200-300 files at any one time. To approve a deal the staffer must have a short sale file that is complete, a legitimate hardship by the seller, and an initial determination that the deal makes financial sense for the lender. Once the file meets those requirements, a senior person makes the final decision.

First, you must write an offer and come to an agreement with the seller. Then, the seller submits your offer and asks for the lender to approve the deal.

Lenders will often tell a seller that they will consider a short sale. But, the process doesn’t even begin until a written offer is submitted.

Some think that a lender will agree simply because the seller is “upside down” on the value of their home. That’s not generally valid. Lenders typically require a hardship to approve a short sale — something like death, divorce, job loss, disability, etc.

The lender will engage an appraiser or real estate professionals to estimate the property’s value. If the proposed short sale is substantially less than the value, the lender will likely refuse it. Buyers can usually get a good price but the lender won’t deviate too far from market value.

Not always with a short sale. The seller sets an asking price to draw an offer. But, the final decision is really up to the lender and they are under no obligation to agree.

Short sales are not for buyers who need to be in a home in 30-45 days. Lenders often take a couple months to approve or decline the short sale. In some cases, it can take up to six months for an answer. Short sales should not be pursued if you need to be in a home by a specific date.

Typically no. The lender generally either takes the offer or rejects it.

The process gets far more complicated if the property has loans made by multiple lenders or other debts such as a court, child support or tax claim. Each individual party must agree to give up all or part of their claim. One holdout will kill the deal.

If the lender has not approved your short sale request yet, they will probably not hold off a foreclosure. If your deal is approved, they may cooperate but don’t count on that. Of note, in Idaho, you must close on short sale at least five days before a foreclosure is scheduled. Idaho law provides that an owner in foreclosure can rescind a transaction five days after closing. Idaho title companies won’t record until that period has run.

Reasons to Avoid a Short Sale