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When a homeowner owes more to the bank than his house is worth, he’s ‘upside down’ or ‘under water’ on his mortgage. If he wants to sell it, he has to qualify with a bank as a hardship case and sell it “short”. This term, “selling short” probably comes from the stock definition of selling stocks “short” vs. ”long”. When you’re “long” a stock, it means you own it and can sell long. When you sell stocks short, it means you don’t own it because you’re “short” or lacking it. So if you own 100 shares of ATT, you can sell it long and the stock is delivered to the buyer. If you’re selling short, it means you’re selling 100 shares of ATT stock (without owning it) and hoping to “buy it back” at a lower price. It’s simply a reverse transaction!

When a homeowner decides to sell short, he technically doesn’t own the home because he has no equity, just outstanding loans. If he decides to sell, he must work with a bank that qualifies him for the sale as being a hardship case. This is because the bank or banks, if there are two loans, are losing money on the loans. Homeowners can’t just sell and dump losses on their lenders. They have to first qualify. Once qualified, the bank appraises the property and sets a price for the sale.

There are two parts to the sale. When the home is listed on the market, the seller, just like in a standard sale, accepts an offer, hopefully, at or above the price set by the bank. Escrow is not opened yet. Upon acceptance, the sellers and the banks negotiate how much the bank or banks will lose on outstanding loans. This process can take 4 to 6 weeks. Once the seller and banks negotiate and settle the loans, the bank appraises the property again and may ask for more money if it believes the home has increased in value.

Once the bank accepts the offer, escrow opens, and a 30-day escrow begins. This is a fairly normal escrow except for cost allocation. Neither the sellers nor the banks have any money to pay for expenses that normally the sellers would incur. So be very cautious; if you’re a buyer, you can be paying for termite work, fees and costly repairs that were unanticipated.

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