What Is A Real Estate Short Sale?

In most parts of the country, home prices drastically increased during the period of 2000 to 2005. During the same time, tons of creative financing products (e.g. adjustable rate loans, zero down payment, interest only loans, option ARMs loans, negative amortization loans, etc.) gained huge popularity and helped a lot of people buy homes who would not normally qualify based on their income, debt level and credit profile.

Most real estate markets are now cooling, and a majority are even experiencing declining property values. In time of decreasing real estate prices, the amount owed on a loan by some homeowners may actually exceed the value of the property. In this case, if a homeowner cannot make their monthly mortgage payment obligations, there is a risk for a default on the loan and foreclosure of the property by the lender.

The term "short sales" is used to describe the situation in which a homeowner is at risk of losing their home due to defaulting on their loan, and the lender agrees to sell the property below the original appraised value in order to avoid a full blown foreclosure. Most lenders do not readily agree to short sales, although exceptional conditions arise such as a home owner losing their job or a death of a wage-earning spouse may make some of them more open to doing so.

If the property is sold as a short sale, the lender recoups a portion of the original loan amount, the homeowner avoids the stress and stigma of foreclosure, and the new homebuyer gets a property below the original appraisal price. If a short sale doesn’t work, then the property usually goes into foreclosure and the lender takes the home back.

Short sales are an emerging trend as the rate of foreclosures continue to rise dramatically across the nation. According to RealtyTrac's most recent U.S. Foreclosure Market Report, the top 10 foreclosure states are:

1. Nevada: One in 122 homes
2. California: One in 192 homes
3. Arizona: One in 201 homes
4. Florida: One in 211 homes
5. Michigan: One in 375 homes
6. Ohio: One in 382 homes
7. Colorado: One in 429 homes
8. Georgia: One in 444 homes
9. Indiana: One in 568 homes
10. Utah: One in 600 homes

While the credit of the homeowner may be impacted after the short sale, it may all depend on how the lender reports the outcome to the credit bureaus. Some lenders may report a partial loan repayment as a full payment of the debt due, which does not adversely impact the homeowner as much. Other lenders may report the short sale as "settled," which will adversely and significantly impact the borrowers credit. The other problem is that the portion of the loan amount forgiven by the lender may actually count as a taxable income by the IRS.

So in summary, a successful short sale has some potential benefits for the homeowner, but there are also many negative consequences. Homeowners that are experiencing difficulty with making their monthly mortgage payments may benefit from talking to a real estate agent who is experienced in the short sales process.

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