A short sale is a real estate phenomenon that occurs during recessions or when mortgage holders lose their streams of income and are forced to give up their houses. As a last resort the home owner sells the house quickly for less than it is worth in order to raise money to pay the bank. While this is a lucrative bargain for whoever buys the house, it shows great financial constraints on part of the home owner.
How Does a Short Sale Work?
The property is often picked up by real estate investors who are simply looking for the opportunity. Essentially the short sale is a mortgage settlement that is reached between the borrower and the bank from where the loan was negotiated. The borrower views the situation differently.
In his opinion he is trying to get out of a mortgage settlement which cannot be paid anymore because he has become ill or financially unable to pay it off. It is a quick method of dissolving the mortgage and this typically happens in the early stages of foreclosure.
Junior Lien creditors are people who have given minor loans to the home owner in question and through the short sale they can hope to regain their money which would otherwise have been lost had the foreclosure process been carried out. Senior lien creditors are not all that fortunate and they do still lose a part of their loan.
The bank will still prefer the short sale if it can hope to raise more from that then it would have at a public auction for example. In the end it is all about profitability and regaining the money and the bank will not show any sympathy towards the borrowers who has now become homeless.
The borrower is naturally put into a very bad place once he or she carries out a short sale as their future credit transactions are affected. They are no longer considered reliable on the basis that they have carried out a short sale and have fluctuating income.
The home owner may not be able to secure a mortgage loan for at least seven more years and this is even if they have a family. Any future real estate agreements will have to be paid in full as no financial institution will go near them.
Some people make money off short sales as they run a business which primarily deals with flipping homes. This is when they pick up houses which are being sold for less than their known worth and then resell them for much more. The profit margin is hence considerable and more often than not all the house requires is some basic fixer uppers to get it sold at a high price.
The short sale model has been acquired by many as the gap between the buying price and the selling price is considerable. However it is all a game of getting there first and scooping up the deal before someone else. This is best left to the professionals however who can handle the risk and any loss that may occur after the investment.