Use a 'short sale' to escape foreclosure

By Bankrate.com

If you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A "short sale," in real-estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders, who often would rather take a small loss than go through the lengthy and costly foreclosure process, in which the lender allows the sale of a home for less than it is worth and forgives the rest of the note.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label, says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana, Calif.

"A lot of people in the last couple of years have just stretched themselves to the limit, and you have people with mortgage payments where even when they got the mortgage, the payment was half their income or more," says Lohrenz. "Now that rates are adjusting, it's two-thirds or three-quarters of their income, and it's just not possible."

Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here's how:

• The seller gets out of the mortgage liability without facing bankruptcy.

• The buyer gets the home at a reduced price.

• The lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too.

"The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process," says Stuart Wilson, a real-estate agent with Paragon Real Estate in San Francisco.

A market saturated with foreclosures can cost lenders billions -- and as much as $50,000 per foreclosure -- according to a study released earlier this year by the congressional Joint Economic Committee.

A buyer's dream

For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale could make a lengthy home-buying process longer and more arduous.

Wilson, who has represented both buyers and sellers in short-sale deals, advises working with an agent who's familiar with short sales.

He also suggests that buyers looking to negotiate a short-sale deal come armed with enough documentation to convince the lender that settling for the lower price is the best option.

"You'd better be armed with recent comparables that show unequivocally that the lender's price is out of line," says Wilson. "You can't do this with a cover letter or a conversation. It will need to be done with the kind of documentation that an appraiser would come up with.

Continued: See who should consider a short sale

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