Short sale is a term that relates to temporary buying and selling of commodities. The limited span of time during the entire transaction is reflected in the word ‘short’. The term ‘short sale’ is defined as “…a sale of security that is not owned by the seller or the sale that is completed by the delivery of a security borrowed by the seller…” The genesis of this term can be traced to practice of traders taking goods from suppliers and selling them. The quantity of money is then returned to the supplier along with a certain amount of interest.
Today, the concept of short sale is observed in many different markets such as the stock market and the money market. A sale of securities by a share broker is also a short sale. Irrespective of the etymology, the term short sale in real estate has quite a different meaning and operation. This process basically involves mortgage loans, lenders and borrowers. The basic process of transaction and its nature remains quite the same. This kind of transaction is part of fiscal and real estate investment. While in the former it refers to short term futures trading. In real estate it relates to the immediate selling off of property to repay a loan amount. Most of the time, a short sale is transacted with the understanding that the trade would have to be reversed soon, even if the commodity is priced lower and incurs a loss (Gaynor Boradehttp).
Short-selling or selling short is an investor’s technique. Those in the stock market benefit via such transactions with every fall in stock price and urgent sale of the instruments. The share market thrives on such short term sales and purchases of company and government stock. A short sale is risky and needs to be considered with caution.
In real estate, most short sales involve real estate deals that come out of the endeavour to sell property for the sake of repaying a loan. Most real estate short sales arise out of economic hardship, to facilitate loss mitigation. The short sale enables the homeowner or debtor to sell the property mortgaged with the bank at a price lesser than the market price and hand over the proceeds to the lender. This helps the individual out of debt.
In finance, a short sale involves the repurchase of the instrument or stock at a later stage. The transaction begins with the purchase of a financial instrument at a price lower than that of the market. The idea behind such a deal is to attempt a profit out of an estimated further decline in market price. This kind of ‘going short’ works for collection of securities that may or may not drop in price any lower and are exposed to the risk of a loss.
The process of buying a short sale, either in the real estate or fiscal arena, involves capitalizing on the sale of securities that are likely to fluctuate in price in the near future. The investor in such a sale also buys with the understanding that the seller is a potential future investor in the same instrument or property. The sales are transacted only to take care of sudden financial crisis and to prevent a foreclosure in the case of real estate.
The purchaser within a short sale benefits from a further drop in security price. This helps the buyer to retain the property for a short period of time and resell when security prices rise. A short sale investment profits from market fluctuations. While the seller loses due to the less-than-market-price, the investor benefits by having to hold on to the property or security for a short while only. When and as the repurchase of the instrument or property takes place, the ‘closing’ position is secured. Buyers invest in a short sale only for profit out of a good deal. It is but natural to jump at an offer that is lower than the asking rate in the market. Even though the profit may not be a huge one, the difference makes the short term investment worthwhile.
Buying a short sale offers the purchaser the following advantages:
- Deletion of negative impact of a foreclosure on credit history.
- Control over the instrument/property deal on account of the seller’s urgency.
- Faster and less expensive transaction formalities.
- Discounted payoff that earns revenue as it lies dormant amidst market fluctuation.
- Protected economic recession of the short sale transaction.
A bond for deed is a contract to sell real property in which the purchase price is to be paid by the buyer to the seller in instalments and in which the seller, after payment of a stipulated sum, agrees to deliver title to the buyer. It may also be called a ‘contract for deed’.
References
Borade, G. (n.d.). Short sale. http://www.buzzle.com/articles/what-is-short-sale.html
Thadani, R. (2010); http://www.buzzle.com/articles/short-sale-process.html
Scholasticus, K. (2010); http://www.buzzle.com/articles/short-sale-in-real-estate.html
