Definition
Short Sale
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A short sale is a compromised agreement between a lender and borrower whereby the former agree to accept the sales proceeds of a property which is lower than the outstanding balance of the debt as settlement of a home loan.
This effectively means that the bank would have to make a loss on the mortgage.
Despite having to book a loss on these types of deals, banks can sometimes be open to such suggestions as the borrower might already be in default, and delaying bold action would only mean greater losses.
For example, a housing loan on a private condominium might have an outstanding debt of $750,000. And because of depreciation, the property is now only worth $700,000 and might be able to fetch $680,000 if the seller does a quick sale. If the lender agrees, the homeowner would then sell the house for $680k to a willing buyer and send proceeds to the lender. The borrower would then be released from the mortgage debt.
Such situations are rare in Singapore because of a strong real estate market where property value seem to be always appreciating. Yet short sales are not unheard off.
To have the best chance of a lender agreeing to a short sale arrangement, it is best that the home owner already has a ready-buyer in place when making such proposals to the bank.
There is also a potential for fraud to occur when buyers are related parties.
For example, a home owner in default might get a brother to “agree” to purchase his house at a discount in a short sale, effectively getting a reduced settlement of the outstanding mortgage.
This is why lenders are very careful when considering short sale proposals from homeowners.
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