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Sunday, February 1, 2009

Taking Advantage of Short Sales to Avoid Foreclosure

By Tomasheus Privetsky

A short sales is one of the tools mortgage lenders use in soft real estate markets to deal with the high tide of foreclosures they're experiencing today. When a homeowner with a high mortgage balance gets behind on his loan payments, a lender has a decision to make related to how to handle the default. He can either start foreclosure procedure or try to get the homeowner to sell the property and pay off the loan.

If the owner is willing to cooperate and sell the property, lenders will often settle for an amount far less than the current balance owed on the mortgage loan. Lenders would rather give homeowners a shot at selling the property below market value before running a foreclosure auction. When a home is sold at a price that won't net enough proceeds to pay of the entire mortgage balance, this is called a short sale.

Yes, a lot more often than you would think lenders are willing to give a green light to sales at prices that do not produce enough cash to satisfy the full mortgage balance owed to the lender. This type of lender-approved sale of homes in foreclosure is known as a short sale. This is a process by which lenders mitigate or minimize their losses due to foreclosures.

Why would a lender allow a short sale if it will result in monetary loss for the lender? The lender is trying to lose less than it otherwise would if the home were to go through the actual foreclosure process, since foreclosure itself is extremely expensive for the lender. Foreclosure involves legal fees, loss of interest income, the cost of evicting the homeowner, back property tax balances, plus insurance and real estate commissions. Short sale results in the lender losing less money than it typically would with a lengthy and costly foreclosure proceeding.

Given the high costs of a foreclosure, many lenders actually net more money through short sales than through foreclosing on and reselling properties. In the current foreclosure crisis, lenders have far more REO (repossessed homes) in inventory than they can reasonably handle. This costs lenders time and money while these non-performing assets continue to sit on the books. But the costs of the foreclosure process itself aren't the only concern for lenders.

They also face major scrutiny from local municipalities to maintain their repossessed empty houses in good condition in order to keep drug related activities away, as well as reduce the vandalism. Some local government go as far as filing lawsuits against lenders who have a high number of REO properties in the area causing further expenses and losses. Under these circumstances a quick short sale settlement may look likeas a desirable alternative to foreclosure.

Most lenders are trying to get rid of their REO inventory and taking big discounts. But many now have discovered that ownership of large inventory of vacant properties is a huge burden. So they are more than ever interested in not taking the REO in the first place. That's why they now have special staff to deal with short sale offers submitted on properties in foreclosure. They are doing everything possible to avoid foreclosure and burdening themselves with the ownership responsibilities and expenses.

Short sale has many advantages for home buyers, since it provides an opportunity to buy a home at a substantial price discount before the public foreclosure auction. Realize though that a short sale is always subject to lender approval. Real estate investors can take advantage of this option by "flipping" the home to sell it at a profit, or by using the bargain home as a rental for ongoing income.

Why would a homeowner entertain an idea of a short sale? Due to current economic crisis many homeowners are finding themselves without steady employment. Without a paycheck families are falling behind on mortgage payments. Many are now facing foreclosure.

Imagine owners who have an over-financed house with high payments they can no longer afford. A short sale is often the only way for them to gracefully escape from their tough situation. For you as an investor a short sale is a unique selling proposition to foreclosure marketing and making great profits.

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