What's a short sale?

Warning:  The following post is actually real estate related (gasp):

Because sometimes people actually expect me to blog about real estate I thought I would take a moment to answer one of the questions that nearly every home buyer (and person thinking of being a home buyer) asks.  No, not the question, "how's the market?"  which is the questions EVERYBODY asks whether they are a buyer or not, but...What's a short sale?  Usually, buyers ask this question after about 30 minutes of being in the market for a home when they inevitably come across an advertisement that says "possible short-sale" or "short sale -- may require lender approval."  So in answer to that burning question...

A short sale basically means that the seller of a home is in a position that they have to sell their house but they cannot sell the home for what they owe on the mortgage (sometimes people call this underwater on their mortgage). Either they've refinanced during the times when lenders were doing questionable loan practices or the home has lost value since they purchased it.  After the loan pay-off and and any selling costs are factored in, the owner does not have the funds to pay off the mortgage. In lieu of a foreclosure, a the mortgage holder will agree to a short sale and the lender eats the difference between the mortgage amount and the actual proceeds from the sale. In a short sale, both the seller and the lender have to agree to a sales contract. Because the lender is involved in negotiating the sale (i.e. they have to agree to take the loss), the sale typically takes longer than a normal human-seller agreeing to sell a home.  Often there are committees that have to meet, financial data that the seller has to provide to the lender, approvals from various agencies, et cetera -- all things that require lots of time and lots of red tape.

The real pluses to a short sale are that you often get a home below market value and it's generally, but not always, in better condition than a foreclosure home as the seller has some motivation for keeping the house in shape.

The down-sides of a short sale are that:

• it takes longer to buy
•  it's generally a sale is as-is because the seller doesn't have the money to repair anything
• the home may not be in the very best condition because the seller is probably having a cash-flow problem which led to the short sale in the first place,
• a number of factors can cause a sale to fall-through.  For example, the home may start as a short sale but the lender can change their minds half-way through and decide to foreclose on the owner. 

My general advice with a short sale is to try not to get emotional and fall madly in love with a short-sale property. Sometimes that's hard. Almost every client I've ever had who purchased a short sale has said afterward that it was a lot harder than they thought it was going to be when we went into the transaction. Some say they would do it again but others said they wouldn't. They just require a good attitude, some flexibility in the closing schedule (know what the lock-in period is for your mortgage rate and choose a longer lock-in period rather than shorter), and flexibility on when you actually want to take possession of the home. A typical thing to keep in mind is that if you have to be out of your current residence on x-day and were expecting to move into your new home the same day, have a back-up plan.

Some real estate agents don't want to deal with short sales at all and I'll admit that it's not my favorite kind of house to sell.  Last May I had clients who made an offer on a short sale (actually one of the nastiest houses I'd ever been in but they were really attracted to the price and the opportunity to fix it up) and it's now almost October and we're still waiting on a response from the seller.

So there you have it, everything you really wanted to know about a short sale, right?  If you are looking for more information, ask away!  Also, if you want a testimonial about the experience, one of my sweet clients volunteered that she would talk to anyone who wants to know what buying a short sale is really like.
She has a really good story that involves a two month period of homelessness* with a husband, a toddler,  a new-born baby and two very cute dogs.  I think she'd probably tell that story in a way that would bring tears to your eyes. 

*they weren't actually "homeless" but they did live in a very very small house with hardly any furniture for almost two months.