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Short Sales 101: Back to the Basics

Short Sale Drama

I sometimes joke with my friends and family that I was not nearly as popular in high school as I am right now. It seems that my recent fame as a short sale aficionado has made me widely popular in real estate circles throughout the United States. As such, I frequently get emails and calls when individual agents and home sellers have what I like to call short sale drama.

If you have ever negotiated a short sale before, then you know about short sale drama. Short sale drama is when you submit your short sale package via fax more than ten times and the bank insists that they have not received it. Short sale drama sometimes involves a request for a promissory note from short sale sellers that have 57 cents in their checking account. Short sale drama fascinates me as I always hear new and different stories about mortgage lenders.

In addition to short sale drama, I also get calls about the basics. In the past few weeks, I have received a significant number of questions about the basics, so I have decided to address those questions here.

What is a short sale?

First and foremost, a short sale is a real estate transaction in which a property is sold for less than what is owed to the bank (or banks). If the bank is going to receive less than the amount owed them, they will need to approve and agree to the transaction. The bank (or mortgage lender) will evidence their acceptance of the short sale in an approval letter. The approval letter will be required in order to consummate the transaction.

If a seller has missed six payments on the mortgage, this does not necessarily mean that the sale will be a short sale. A short sale transaction only exists when the seller is ‘upside down’ and owes more to the bank than the sale price. For example, an unemployed borrower may be forced to miss a few mortgage payments. However, if this borrower has equity in the property, then the transaction is not a short sale.

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Sometimes there can be two (or three) loans on the property. In a short sale transaction where there are multiple loans (or liens) against the property, it is possible that some of the lien holders will be paid in full. For example, if a property is being sold for $300,000 and there are two liens against the property (each for $200,000), the first lien holder will be paid in full and the second lien holder will need to participate in the short sale.

The settlement statement is crucial

In order to determine whether the borrower needs to participate in short sale, you will need to prepare a final settlement statement. Your escrow officer or title company can prepare that for you. Remember that the settlement statement needs to include all fees associated with the transaction (i.e., pest control, agent commission, property taxes, etc.). The settlement statement is the best way to confirm whether the transaction is a short sale. It is also the only way to show the lien holders what they will each net in the short sale transaction.

Written By

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®, and Chief Executive Officer of Transaction 911. Before landing in real estate, she had careers in education and publishing. Most recently, she has been able to use her teaching and organizational skills while traveling the world over—dispelling myths about the distressed property market, engaging and motivating real estate agents, and sharing her passion for real estate. When she isn’t speaking or writing, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.



  1. Rob McCance

    September 28, 2010 at 3:08 pm

    Very good.

    • Melissa Zavala

      September 28, 2010 at 11:08 pm

      Rob: That’s all you have to say? Last week you were so vocal! I didn’t get time to reply last week, but wanted to thank you for your candor as you addressed your thoughts on the frustrations and the short sale process.

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