Taking a long look at short sales.

• Author: Cuevas, Mike
• Position: Business & Finance

HISTORICALLY, short sales have a bad reputation among homeowners and the real estate community and, in many ways, this negative perception has grown during today's down economy along with feelings of frustration and loss. Simply heating the words "short sale" can put a homeowner's blood pressure through the roof, and the decision to proceed with a short sale often is made with trepidation and even embarassment. Yet, these negative perceptions often are based on misinformation and a lack of knowledge about the short sale process.

[ILLUSTRATION OMITTED]

When it comes to short sales, there are a few things every homeowner needs to know. Very simply, a short sale is when a lender agrees to discount a loan due to an economic hardship on the part of the homeowner. Typically, a short sale is used to prevent a home from being foreclosed. Usually, a bank will allow a short sale if it believes it will result in a smaller loss than the expense required to foreclose.

Short selling real estate is a technique real estate investors (and some realtors) do to help homeowners avoid the damaging effects of foreclosure. For example, if a homeowner owes $200,000, a short sale might allow them to sell for $180,000, and the lender accepts $180,000 as payment in full. In some cases, the homeowner still would be responsible for the remaining $20,000.

In several states, the foreclosure process takes place via the court system, which can be lengthy and time consuming. In most cases, it can take as long as nine to 12 months--and the process can be delayed further if the homeowner has the proper legal representation in court who can make a case for prolonging the foreclosure.

Along with the time and cost of such cases, lenders do not like excess inventory or foreclosures on their books, especially in this market, and they can risk losing more money if the property goes to auction. It also is important to understand that lenders do not have any motivation other than recovering or halting their losses. They are not in the property management or real estate brokerage business, and have no motivations in that direction. Their goal is not to loan money on properties and men take them back via foreclosure to resell them for a discount. This would not be a very profitable business model, and one thing most banks do well is make money. Hence, lenders often have some of the same goals as homeowners and, when a deal does not pan out, all they want to do is stop their losses...