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How does a short sale work?

On Behalf of | May 31, 2024 | Real Estate Law

Many buyers view a short sale as a bargain. They get a home for much less than the market value. But it can also be more complicated than a traditional home purchase, and it’s important for these potential buyers – and sellers – to understand what legal steps to take.

Essentially, a short sale is just when the homeowner gets permission from the lender to sell the house for less than they owe. The lender can collect the money from the sale, and any remaining balance is forgiven. Therefore, the new owner feels like they got a bargain, while the previous owner gets to eliminate their debt.

Why would this be a viable option for the lender?

Many people wonder why a lender would ever take less than the amount of money that was still owed. Why would they see this as a good option?

Short sales often happen when the lender is concerned about not receiving payment anyway. For instance, say that someone buys a home for $300,000 and can’t make the monthly payments. The lender could foreclose, but that can be a lengthy and expensive process anyway. It’s clear to them that they are not going to get the $300,000.

But a potential buyer may be willing to pay $200,000 for the same home. The lender would rather recover two-thirds of the sale price than nothing at all, so they permit the short sale and take less money.

As noted above, though, short sales can be complicated, despite their potential benefits. Those considering one must be aware of the legal steps they need to take.