A.CRE

Short Sale

The sale of the property for less than the outstanding debt balance owed to all lienholders (typically senior and mezzanine debt providers). The property will fall into foreclosure if all parties do not reach a consensus agreement to sell.

Putting ‘Short Sale’ in Context

Background

John Thompson, a private individual and owner of a single-family home named Creekside Retreat in Boise, Idaho, is facing financial hardship due to unexpected medical expenses and a loss of income. His mortgage balance is $400,000, but the current market value of the home has declined to $350,000. With no other feasible options to address his financial situation, John is considering a short sale to avoid foreclosure.

The Scenario

John’s lender, Idaho First Bank, holds a senior mortgage on the property, and a second lien for a home equity loan is held by a local credit union. For the short sale to proceed, both lienholders must agree to accept less than the amounts they are owed to allow the property to be sold for its current market value.

John lists Creekside Retreat at $350,000 with the help of a local real estate agent. After two months, he receives an offer for $345,000. This offer is contingent upon approval from both lienholders.

The Agreement

Idaho First Bank agrees to accept $315,000 as a payoff for the senior mortgage, while the local credit union agrees to accept $10,000 for the second lien, leaving the remaining $20,000 unpaid. Since both lienholders agree, the short sale proceeds.

Outcome

By completing the short sale, John avoids the severe credit implications of a foreclosure and the prolonged legal process. While the sale does not satisfy all the debt owed, it mitigates greater financial and emotional consequences for John.

Calculation of Lender Recoveries

  • Total Sale Price: $345,000
  • Amount to Senior Lienholder: $315,000
  • Amount to Junior Lienholder: $10,000
  • Total Lienholder Recovery: $325,000
  • Remaining Debt Unpaid: $400,000 – $325,000 = $75,000

This hypothetical case illustrates the practical application of a short sale as a mechanism to manage financial distress for a homeowner, while balancing the interests of lienholders to avoid foreclosure.

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