What is a Short Sale?

… and How Much Will a Bank Discount in a Defaulted Loan?

What is a Short Sale?

A short sale is the sale of a property for less than what is owed on it . This happens in over mortgaged properties. These properties are worth less than the total amount of debt that encumbers them. As a result they cant be sold for what it is owed on them. Selling at what is owed on them places these properties above market value. Been above market value makes them un-sellable. In other words nobody will pay for them enough to cover all what is owed on the property. Most properties in pre-foreclosure that can not be saved by the owner are over mortgaged.

In a short sale the creditors authorize the home owner to sell the property for an amount lower than what is needed to pay all the creditors secured by the property . Creditors accept short sales in order to cut their losses. They rather get a specified amount through a short sale than risking getting even less or nothing at a foreclosure auction sale. Whether or not, and how much a creditor chooses to discount on the amount owed on a property depends on how high is their loss risk.

Short Sale versus Release of Lien

Good short sale acceptances are the result of successful discount negotiations with creditors. There are two possible outcomes out of a discount negotiation with a creditor: a short sale or a release of lien. Both have the same result at closing the sale of the property. However, the implications for the homeowner are entirely opposite.

In a short sale the creditor settles in full the amount owed by the debtor for a value that is less than what the creditor is owed. The remaining balance is forgiven. The home owner does no longer owe anything to the creditor.

In a release of lien, the creditor removes its security interest in the property but the amount owed is not forgiven. The home owner still owes any balance owed to the creditor.

A creditor that authorizes a short sale will issue a settlement letter stating that the debt is settled in full for a specified amount. This letter becomes part of the escrow instructions the title company needs in order to close the transaction. In addition the settlement letter will state that the home owner is not liable for any of the creditors loss and that the loan will be reported to the credit reporting bureaus as settled. This subject will be presented in further detail later in this chapter.

A creditor that releases a lien will , prior to releasing the lien, make the home owner sign a new promissory note, not secured by a trust deed on the property, stating the value of the debt and the terms of payment. Typically creditors prefer short sales to releases of lien. This is because it is very hard to collect an unsecured debt from a person in financial hardship. This subject will be presented in further detail later in this chapter.
Why and When Do Creditors Discount

Creditors do not discount because they like it. They only discount if they are cornered into the unpleasant situation of loosing in their investment. In other words creditors discount because if they dont they will loose even more. The higher the chance they will get paid at the auction sale, the lesser the chance they will discount, if at all. The lower the chance they will get paid at auction, the higher the chance and amount creditors will discount.

Creditors discount debt secured by real property based on their convenience and risk.

• If they will surely get paid they will not discount at all.
• If they will most likely get paid most of what they are owed they will discount somewhat.
• If they will definetely loose an amount but still get something at the auction, they will discount based on how much are they sure to get at the auction. The short sale that will be approved will most likely be just above what the creditor expect to get at the auction.
• If the creditor will most likely get nothing at the auction, they will be inclined to discount heavily in order to get a recovery.

In addition, banks and other large institutional creditors, discount according to their own policies. The type of loan also affects a banks ability or latitude for discounting and accepting short sales. This subject will be presented in further detail later in this chapter.

Regardless of the type of creditor secured by the property, the chances of them getting paid at the auction sale are directly correlated to their secured equitable position in the property. All this is reflected it the title report. For the moment it suffices to say that the further down a creditor is in the title report, the less likely it is going to get paid and the most likely the creditor will discount. This subject will be presented in further detail later in this chapter.

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