Real Estate Short Sale: Explain, Please

Real Estate Short Sale: Explain, Please

Ever wonder exactly what the currently popular phrase "real estate short sale" means? With the economy producing an increasingly awful real estate market, many institutions are looking towards real estate short sales as an alternative to going through with a foreclosure. Throughout the country, the prices on real estate have dropped and the time that is required to make a sell is on the rise. It is not unfair to label the current real estate market one that is undergoing a market meltdown in many cases, and Detroit is one of those. Declining real estate markets are the primary reason for the rise in short sale real estate opportunities.
The exact definition of a real estate short sale is that it is what occurs when a bank agrees to let a property be sold for less than the amount owed to the financial company. Since a short sale requires an significant financial situation for a bank, many institutions require two conditions before they will agree to a short sale. The first condition is that market values must be in a state that the property's sale price cannot cover the outstanding balance on the mortgage. The second condition is kind of obvious, but it dictates that the owners will be unable to continue making mortgage payments on the property.

For example, a property that was purchased five years ago with an adjustable rate mortgage for 217,000 dollars. Let's say that two years after purchasing the property the owners took out an additional 10,000 dollars second mortgage, which means that today the owners owe 227,000 dollars on the property. A five year span of time would result in a small amount of the mortgages actually being paid off. We'll also imagine that the property value has decreased to 215,000 dollars while the mortgage interest rate has increased from seven to eleven percent. Add in the additional problem of one of the owners having lost their job, and you end up with a very likely real estate short sale scenario.

Rather than go through the expense and time delays that a foreclosure proceeding would require, the bank may decide that allowing a short sale makes more sense in the long run. Banks do this because it allows them to accept a definite amount of money and because it allows them to get the property off their books. The process can occasionally become complicated, particularly if the owners and the lenders reach an stalemate when it comes to agreeing to terms, but overall, that is how a real estate short sale works.

While a real estate short sale is an unfortunate and unpleasant experience for an owner forced to go through the process, it's not the end of the world. In terms of items that would reach the credit report, there would be far worse items, such as foreclosure. On the positive side, it can represent a great buying opportunity for the smart real estate investor.