A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from a seller, the propery is purchased directly from the lender for a discount. Short sales come about when the property owners become "upside down" -- when the seller owes close to or more than the propery is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to as a "short pay" or "short sale."
WHY ARE LENDERS WILLING TO ACCEPT A DISCOUNT?
There are several reasons. First of all, banks don't like excess inventory and bad loans on their books, so if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. And in a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. From the lender's perspective, a short sale saves many of the costs associated with the foreclosure process such as attorney fees, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. But first, owners have to convince the lending organization that they will be far better by accepting less money now.
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