One of the most common misconceptions we see is understanding the relationship between short sales and foreclosures. Hopefully this article can help define exactly what a short sale is and how each transaction is unique.

We get many inquiries from brokers and sellers who are looking to sell and unfortunately need to bring cash to closing that they simply don’t have. Sometimes this is known early on before finding a buyer but we’ve also seen it just a few days prior to closing once the payoff is received back from the title company. 95% of the time this situation is not a short sale and we’re unable to meaningfully assist. Here’s why:

The entire reason why a mortgage lender would accept a lower payoff through a short sale is because without action, the property is at risk of being foreclosed upon and the lender is looking at taking the property back at auction. Lenders are offer it as a solution to mitigate their own losses. Because they’re not in the business of property ownership, they would then have to sell on open market as bank owned or REO (real estate owned) property. They accept a short sale because they know they can recover more money sooner than if they were sell themselves at an unknown date in the distant future.

Our short sale definition: when a lender voluntarily accepts less than what is owed as an alternative to foreclosure.

If there’s no foreclosure or even a whiff of it, why would the lender accept less? We have seen instances where a default is imminent and the lender may consider an early application but many times they require that a loan is at least 30 delinquent in order to approve. A short sale is not a tool sellers can use to avoid bringing the money to closing and more creative solutions are often needed. Additionally, it can often take many weeks/months for lenders to evaluate the offer, property valuation and seller’s financials (which often includes income verification) and if the seller has financial reserves they may be required to contribute.