Let’s say we have the following situation:

·         The Seller owes $1,000,000 on his condo.  He is broke and cannot pay his mortgage.  And, he can prove this and he submits a hardship package that is approved.

·         The condo is listed for sale as a short sale, with a listing price of $850,000 and a commission of 6% to the brokers.

·         Say, the seller gets an offer for $600,000...

 

Here is how the math would work, assuming that the bank allows this short sale:

·         Buyer pays $600,000

·         Commission is 6%, or $36,000

·         Assume that taxes and other debts are due, for $25,000

·         Assume that closing costs for the seller are $5,000

·         The total of closing costs, commissions and debts are then $66,000

·         Since the buyer is paying $600,000, that is short of the amount owed to the bank by $400,000.  So, the $400,000 has to come from somewhere.  Also, there are $66,000 in closing costs.  Where does that come from?

·         The total amount needed to close the gap is $400,000 plus $66,000, or $466,000.  So, the lender will have to issue a payoff letter, not showing that $1,000,000 loan has been satisfied, but rather, for a calculated amount of $1,000,000 minus $466,000, or $534,000.  The lender says, then, that if it gets $534,000 at closing, they will close the loan, and move on.

·         So, look at it this way.  If the seller says that it will accept $534,000 and close the loan, here is how the numbers add up.  The buyer pays $600,000.  From this amount, the lender pays the $66,000 in commissions and other closing costs.  This leaves the lender with $534,000.  Closing costs are paid.  Loan is satisfied.  Seller walks away.  Seller has zero proceeds, of course, but the short sale is concluded.  The lender takes a write off of $466,000 and calls it a day.  By the way, a foreclosure may cost the lender more, so they are happy to settle this way.