Real Estate Definition: What is a Short Sale?
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
A short sale of real property means the money from that sale does not completely cover the mortgages and other liens against the property. When this happens, if the companies holding the liens agree to accept less than they are owed, then the sale can proceed.
A short sale has two parts: (1) The mortgage company must agree to accept less than the amount it is owed, and (2) the sale must be legitimate for an amount at or below the property's appraised value. A cautious buyer will not pay more than the appraised value, and a lender will not fund a mortgage for more than the appraised value. As a result, the short sale proceeds are limited to the real estate's appraised value.
Note, however, that the mortgage holder does not have to accept the appraised value for the property. Instead, the company can demand a higher selling price. In that case, a sale with a legitimate buyer is not a reasonable outcome. If the mortgage holder demands a sales price higher than the appraised value - yet less than the amount owed on the mortgage - then the selling price is called a short settlement.
A short sale can be attained only when a mortgage holder will accept less than the amount owed on the debt while also accepting a sales price that is equal to or lower than the appraised value of the property.
Before a short sale can be approved, creditors holding any of the following liens must agree to accept less than they are owed: first mortgages, second mortgages, home equity lines of credit (HELOCs), homeowner association liens, mechanics liens, IRS and state tax liens. While the creditors do not have to agree to settle for less than they are owed, they usually do because their option is for the real estate to go to foreclosure.
Both the short sale and foreclosure result in black marks on the property owner's credit rating; however, the short sale's negative credit impact is less because the owner acted more responsibly and proactively than allowing the property to go to foreclosure.
If you have any questions about short sales and foreclosures in Illinois, please give me a call. As a Chicago financial rescue and bankruptcy lawyer serving Illinois and the greater Chicago area, I provide a full range of financial legal services, including foreclosure assistance, bankruptcy, mortgage and loan refinancing, credit repair foreclosure assistance and debt consolidation, foreclosure avoidance. Your initial consultation, by phone, email or at my Chicago law office is free.