Briefly, a short sale is when the owner of a property needs to sell, but the market value of the property is less than what he/she owes. The owner must go to their bank, hat in hand, and show cause as to why the bank should allow a sale of the property for less than what is owed on the mortgage and (here’s the kicker) forgive the difference. Normally, if the bank were to foreclose, they would sue the former owner for the difference of what was owed and what the bank got at the foreclosure auction. It’s called a deficiency judgment. But with a short sale, if the owner’s hardship is great enough, the bank will forgive the difference.
In some cases, if the hardship is not great enough, they may ask for a nominal cash donation or carry back a small second, or both. To begin the process the owner has to stop making payments for at least two months to get the banks attention. And even after they stop making payments, the banks are still painfully slow in responding to any offers presented the owner for approval. By that time the owner’s credit is ruined for about three years. But it would be even worse with a foreclosure because foreclosures stay on your credit report for 10 years.
The way it works is, a buyer makes an offer to the owner/seller’s agent through his/her agent. The owner/seller can accept your offer, but the property stays active in MLS until the owner/seller’s bank gives its written approval to that offer. The bank doesn’t own the property, the owner still owns the property, but because he is asking the bank to forgive the difference between what he owns and the value of the offer, the bank has the final say. The seller is given a short time period within which he must present the buyer’s offer to his bank for approval. The buyer must provide a pre-approval letter from their lender, or proof of cash funds, to present along with his/her offer. The seller’s bank is under no obligation to approve the offer, even if it’s at the asking price listed in MLS. On rare occasions they make the decision sooner, but in most cases you should be prepared for the bank to take two to three months to respond.
Once the seller’s bank approves an offer it can take another three to six month for the deal to “close”. In Hawaii, “closing” is the day the title changes hands and the transaction is recorded at the Bureau of Conveyances.
Here is a link to part 5 or 5 for an article on short sales. Helpful Hawaiian Links to parts 1 through 4 are at the bottom of the page of this article. Since there can be no Helpful Hawaiian Links to parts 2-5 on part 1, you will have read part 1, then go back to part 5 to link to part 2, and so on.