Short selling real estate involves many parties, but the principal players in a real estate short sale are the owner of the property and the lending institution that owns the mortgage against that property.
If a person has fallen behind in their mortgage payments, and the local real estate market has collapsed, then a homeowner might want to begin discussions with their lender about a short sale of the property.
In an ideal world, the person who took out the mortgage loan on their property would see continual and gradual increases in their home, meanwhile paying down the principal on their mortgage note. The lender would enjoy the benefits of a steady revenue stream from the interest portion of those monthly payments, all the while improving the lenders balance sheet with cash coming in to be made available for more lending.
In reality, there are millions of loans on the books that are in default around the United States, in which the borrower can no longer meet the payments on their mortgage. The borrower has lost their job, experienced an adjustment in the interest rate and payments to a point where it is out of their reach, or another calamity has stricken causing a radical change in the homeowner’s financial picture.
To the lenders, this has a caused a stranglehold on liquidity, with nonperforming loans choking off their ability to make new loans.
For both the borrower and the lender, a goal to be achieved is for that mortgage loan to be paid off, without the bank ever taking possession of the real estate, and without the borrower having their credit smeared by the cloud of a foreclosure having been filed or a foreclosure judgment handed down by the courts.
In many markets today, the fair market value of the real estate has declined below the balance due on the mortgage. And here is where the short sale comes in.
Lenders don’t like foreclosing on real estate, especially real estate in which the owner lives there. It is messy, it is expensive, and it takes anywhere from 6 to twelve months, during which it is likely the lender will receive no payments of any kind. And in the end, the lenders end up with a piece of real estate, when their goal is to end up with cash to lend out again.
The borrower needs to remember that when they approach their lender about the idea of short selling their property, because the lender is going to balk at the idea of accepting less for the property than the balance due on the loan. However, if you can show there is little likelihood that even if the lender forecloses they will not be able to collect any shortage caused by a foreclosure sale, the lender is very likely to listen.