The term “short sale” is getting a lot of use these days, in Washington State and around the nation. Many people know that short sales offer the opportunity to get a good price on real estate. But what, exactly, is a “short sale”?
A short sale is the sale of a home for a price less than what the owner owes on the mortgage, AND the lender agrees to a “short” payoff in exchange for release of the bank’s lien on the property — hence the term. But that definition requires a little more explanation, because some readers might be thinking, “Release the lien? What does THAT mean?”
When you buy a house using money borrowed from a bank, you sign a deed of trust (along with about a thousand other documents! ). The deed of trust pledges the home to secure the debt, so if the borrower does not repay the debt the bank has the legal right to sell the house without the owner’s consent (a foreclosure auction) and to apply the proceeds from that auction towards the debt. Thus, a deed of trust creates a “lien,” a legal right of another besides the owner to sell the property in order to repay a debt. There are lots of types of liens besides a mortgage, such as a contractor’s lien. To “release a lien” means to eliminate that right of another to sell the property.
Why is that important? When you buy a home, you take ownership of it subject to any existing liens. So if you bought a house where a contractor had put a lien on it a few weeks earlier, that contractor would have the right to sell your house to pay the debt incurred by the prior owner — a big deal!! Accordingly, before the seller actually conveys title to the buyer (the legal term meaning transfer of ownership), the seller must satisfy all liens or otherwise insure they have been released.
Back to short sales: Many people use the term to describe any sale where the sale price is less than the amount owed, but that really isn’t a short sale, at least not until the lender agrees to a short payoff. Rather, if an owner gets an offer to purchase for less than the amount owed, the owner/borrower always has the option of bringing money to the table to repay the mortgage in full, i.e. pay the difference between the sale proceeds and the amount owed. If the debt is repaid in full, the lien must be released.
But some people — well, pretty much ALL people — would strongly prefer to not pay money in order to sell their house. (Remember the good old days, when sellers would MAKE money by selling?) Accordingly, if the seller gets an offer to buy for a price less than what is owed, the owner will approach the bank and ask the bank to release the lien even though the loan will not be repaid in full. The lender has no obligation to agree to the request. Alternatively it can agree, but only if the seller continues to make payments on the balance of the loan following the sale. That said, particularly if the property is a residence, most lenders are willing to forgive the unpaid balance entirely. In either event, though, a “short sale” means that the bank has released its lien even though the debt has not been repaid in full.
So why does a “short sale” possibly present a good opportunity for buyers? The seller in a short sale has virtually no motivation at all to get the best price for the property, because 100% of the money is going to the bank. Accordingly, short sales tend to be priced lower in order to simply get an offer that can be presented to the bank. Once it gets to the bank, the bank is less likely to counteroffer or otherwise negotiate aggressively — that is not the bank’s line of business. So, short sales can present good opportunities for buyers — with lots of risks, though, that I will address in a future post.
Finally, as indicated by the title, this post addresses short sales in Washington State. Every state has different laws regarding real property, and moreover I practice (as an attorney and as a broker) exclusively here in Washington. Accordingly, my knowledge of short sales is limited to those in this state. That said, short sales – unlike other aspects of real property law, such as foreclosures – generally do not differ much from state to state as I understand it. Accordingly, the principles discussed above may also apply to your state. But remember: You should always consult an attorney in your area, and never get legal advice from a blog.