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Posted by Jeff Strickland on November 26, 2006, 12:36 pm
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>>
>> You are describing a "short sale". In a short sale, the proceeds of the
>> sale do not satisfy the outstanding principle.
>
> I think the term "short sale" is sometimes used when a lender (maybe a
> second or third mortgage holder) knows it is never going to see its money
> and agrees to just accept less. Around here (New Jersey), investors
> sometimes get the homeowner to sign an agreement of sale subject to the
> mortgage holder who is in last position agreeing to accept less than the
> full balance and as full payoff. The lender sometimes does that when they
> know that if the property goes to foreclosure and sheriff's sale, they
> will end up with nothing. The seller likes it because it avoids a
> foreclosure on their credit report.
>
I'm pretty sure that a short sale is any sale where the proceeds of sale do
not cover the existing indebtedness. The seller is burdened in this case
with covering the shortfall. Of course, the seller could declare bankruptcy
after a short sale and seek to avoid paying the indebtedness not covered by
the proceeds of sale, but this has implications that will affect many future
plans.
I was once faced with a short sale on my home. My wife and I wanted another
home that would meet our needs and desires better than the home we already
owned. We could afford the new home, and we qualified for the loan. All was
set to go, we only needed to sell our existing home. This is when we found
that our house was worth less than we owed. We were faced with a short sale
situation. We could not cover the shortfall that would be created by the
sale, and the home we wanted to buy was priced at the limit of the appraised
value -- meaning we could not get a larger loan that would generate proceeds
to cover the shortfall. At this point, our choice was to sell and declare BK
to avoid paying the shortfall -- but such a decision would impact our
ability to buy the new property -- or simply stay put and deal with the
house we already owned. We added a room addition to the home we already
owned and this created the feature set of the home we sought to buy. Now,
our original home has increased in value and we hold substantial equity.
In my example, the short sale was not a distress situation, and our option
was not to sell short or foreclose. Our options included continuing to make
the scheduled payments and pouring in some more money to get the house to
where we wanted it in terms of square footage and room count. I don't think
the lenders care very much about the distress of a borrower, and they want
the money that is owed first and foremost. If there is a short sale, they
are going to come after the borrower for any due funds.
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