Can a Home Seller Make Money from a Short Sale?

The short sale process can be a complicated and sometimes confusing one for many homeowners.

Understanding the Short Sale Process

A short sale is a financial arrangement between a home seller, a buyer, and the lender that allows the home to be sold for less than the outstanding mortgage balance. However, it's important to understand that in the case of the seller, taking part in a short sale is not typically about making a profit, but rather about resolving financial hardships.

The Basics of a Short Sale

When a home seller's mortgage exceeds the current market value, they are considered "short." In a short sale, the home's value is compared to the remaining balance on the mortgage. For instance, if the mortgage balance is $500,000, but the property is only appraised at $350,000, the seller is short by $150,000. The primary purpose of the short sale is to allow the seller to pay off the mortgage with a lower amount, thus resolving the financial hardship and avoiding foreclosure.

Why a Short Sale Isn't About Profit

The short answer is no. A seller who needs to perform a short sale is essentially in a situation where they owe more on their house than its current worth. The seller must demonstrate to the bank that they are facing significant financial hardships, such as job loss, divorce, or other unforeseen circumstances. The bank, in turn, forgives the remaining debt. Whatever the home sells for, the bank or the holder of the lien keeps the proceeds.

Historical Context and My Experience

Having a deep-rooted experience with short sales since the 1980s, I've witnessed the process countless times. The benefits of a short sale often come in returning the home to a more stable condition. This doesn't always translate into substantial financial gain for the seller, though. In a few instances, the homeowners have managed to cover the cost of moving but haven't been able to put down a down payment on their next home.

Conclusion and Final Thoughts

While a short sale is not primarily about making money, it can provide a financial relief for the seller in dire circumstances. It's a way to avoid a foreclosure and keep a clean credit record. For those facing significant financial hardships, the short sale process can be a viable option, but the financial outcome is not always positive. Understanding the process and working closely with a real estate professional or a financial advisor can greatly impact the outcome of a short sale.