In this introductory post, a new series is born and will take an adventure through the world of Short Sales. In What is a Short Sale Property?, we'll look look at the definition, how a property becomes and some causes of a short sale situation, and how to purchase a short sale in 2016.
Definition: Short Sale
A short sale has nothing to do with a time-frame when purchasing and everything to do with the seller's loan and the property's selling price.
Short Sale: A property being sold for less than what is owed, or liened, against it. Upon selling, if there's not enough proceeds, to payoff the loan, then its considered a short sale.
How Does a Property Become a Short Sale?
Let's start at the beginning.
If a property is purchased using a form financing, the agency, institution, or bank issuing the loan associates a lien with the property as collateral. That collateral serves as the lienholder's interest in case of loan or mortgage default.
Even though a lien is created in this process, the purchaser owns the property. The property owner can sell, will, or gift the property to another party, without the lienholder's permission so as the lien/loan is satisfied. If the lien/loan cannot be satisified then the property can fall into a short sale situation. So, how does a property become a short sale?
- Market forces pull the property's value lower than its loan amount.
- Acquiring multiple loans against the property which exceed the property's market value.
*Note: this only applies if a property is being sold.
If a property owner wants to sell for less than what is owned against it then lienholder's permission (consent) is required.
However, if a property owner pays the difference between the sales price and liened amount against it, then the owner doesn't require lienholder's permission because that property is no longer a short sale.
What Are some Causes for a Short Sale?
Some causes were mentioned prior yet here is a larger list.
- The property's market value decreases.
- To many loans against the property.
- The owner has a unforeseen relocation and has to sell during a down market.
These causes can be accentuated by a financial hardship: job loss, reduction in hours/pay, medical reasons, and/or forced relocation.
How are Short Sales Purchased?
When buying a short sale there are some very important items and they can be read at Learn How to Buy a Short Sale Property.