Short Selling a House

"Our house is a very, very, very fine house
With two cats in the yard"
- Crosby, Stills, Nash & Young

A family I know fell behind in their mortgage payments and wanted to work with the bank to catch up but the bank refused to cooperate. After a year with no settlement, the bank has agreed to "short sell" the house and our friend will move elsewhere. What does "short selling" mean?

A short sale is a sale of real estate in which the sale price falls short of the balance owed on the property's loan. ... Both parties consent to the short sale, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan. - Wikipedia

In a short sale the house is sold at or near market prices in a depressed market (much higher than a foreclosure sale but less than the purchase price). The seller saves their credit rating but may still have to make good on the entire loan (ouch!)

The buyer of a short sale may get a great price but the money saved might not be worth the extra hassle and additional months to closing. Read "What It's Like To Buy A Short Sale House" from Consumerist.com. The story ends happily but oh, the stress and follow-ups and loops to jump through along the way. And there was always the chance that the house would be auctioned off before the short sale was closed (and even afterwards).

Bottom Line

Read the comments on the Consumerist Short Sale story for more examples of short sales gone bad (or very slowwwwly). As one buyer put it, "I certainly would not recommend the short sale process to anybody, ever."