FEB 11, 2023
By definition, a short sale is when the original mortgage lender of the property decides to accept an amount lower than what's still owed on said property. During the peak of the Great Recession over a decade ago, short sales made up roughly 1 in every 4 MLS listings nationwide.
The motivation for a bank to agree on a short sale is usually driven by: the homeowner's financial situation, and a decline in the property's value - both resulting in the homeowner likely having negative equity in the property. The bank's priority is to recoup as much as it can, and write off the remaining loss on its books by forgiving the borrower.
A foreclosure entails a bank taking over a property, evicting the occupants/homeowner, and trying to sell the property on the market to recover its costs. A foreclosure typically damages the homeowner's credit more than a short sale.
The difference is that in a short sale, the bank agrees to the fact it won't recover all of its costs and has to forgive a portion of the loan - but the advantage is that it doesn't have to go through the lengthy red-tape process of foreclosing on a homeowner.
The bank, the buyer, and the seller all get something from the transaction but the goal is similar: minimizing the loss. The bank would accept a short sale if it feels it'll lose less money than going into a foreclosure, the seller would likely walk away with nothing because of the negative equity, and the buyer would be purchasing a fixer-upper house at a below-market price.
An advantage for the seller is that they may get 'relocation costs' covered, and have less impact on their credit vs. a foreclosure.
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.