What is a short sale? - Virginia Beach Neighborhoods

John and Jane bought their home in 2006 for $400,000 with a 20% down payment ($80,000). Today, the market value of their home is about $300,000 and there is a 10 months supply of homes on the market in their neighborhood. They have $5,000 is savings and John expects to lose his job in the next six months.

At this point there is very little they can do. If they put the house on the market for $350,000 no one will buy it because it is overpriced. But they can’t afford to sell it for market value. They are stuck in their house.

Is it possible that they could talk to their lender and convince the bank to take a loss on the mortgage? Sure, anything is possible. But in this situation it is unlikely. John and Jane made a promise to the bank that they would pay off the  $320,000 along with interest over the course of 30 years. As long as John is making his payments, why would the bank renegotiate the terms of the loan?

Everything changes when John loses his job. He can’t make the mortgage payments. Now he may be able to deal with the bank. It is generally more expensive for the bank to repossess the house than it is for them to work with the owner so he can sell it.

So John and Jane put their house on the market for $250,000 “contingent on bank approval.” Since they don’t have the funds to make up the difference between the sale price and what they owe, the bank will have to agree to forgive the difference and take a loss. This is a short sale.

$250,000 may seem like a great deal to a buyer but it is unlikely that the bank will approve a sale 20% below market value. This price tag is simply the bait to get as many people to look at the house as possible and make an offer. $290,000 is probably closer to the mark. To make things even more confusing, it can take the bank several weeks to make its decision. And you are not even guaranteed to have your purchase offer accepted! For a buyer on a timeline, this can be a showstopper.

For buyers, short sales can provide great opportunities, and pitfalls. So be careful.