What is a short sale?
A real estate short sale is a transaction in which the owner sells a property for an amount that is less than what is owed on the mortgage loan and other liens. The lender may choose to either forgive the remaining debt or release the mortgage while still pursuing the owner for the balance of the loan. In most cases, a seller cannot receive proceeds from a short sale transaction. A short sale can occur with residential and commercial properties.
Joe and Sally purchased their home for $300,000 in 2006. They borrowed $285,000 via a purchase money mortgage. In 2011, Joe was laid off from his job and Sally had to cut her work hours to care for her ailing father. Since Joe and Sally fell behind on their mortgage, they asked a real estate agent to list their house. The agent reviewed comparable sales from the area which suggested that the house was valued about $250,000. The agent listed the house at $249,900 and soon received an offer for $245,000. Since Joe and Sally owed about $280,000 and the mortgage was in default, the lender eventually agreed to permit the sale for $245,000. The lender allowed the agent to receive a sales commission. Joe and Sally received no proceeds from the sale, but they were pleased to avoid a foreclosure that would have severely damaged their credit and would have been embarrassing.