Short Sales
Short Sales at Foreclosure
By Buyincomeproperty.com
Nov 3, 2005, 17:28

You may think that short sales are fairy tales. After all, a short sale simply doesn’t make financial sense. A short sale – by definition – is the sale of property for less than it’s value. If you’re involved in real estate on any level, you have probably been trained (or have taught yourself) the value of the commodity you trade in. People simple don’t go around giving property away, or even agreeing to sale at less than the value – unless there’s a problem. The fact is, there are some instances in which a short sale is just a good idea, and there’s no reason you shouldn’t be the one to benefit.

You’ve probably been raised to believe that you SHOULD look a gift horse in the mouth, and a short sale may very well look like a gift horse. Anything that seems like an incredible deal is suspect, and a short sale may be an incredible deal.

Real estate is one area in which the buyer and seller are charged with always watching out for their own interests. It’s not that there are tons of unscrupulous buyers and sellers so much as the fact that most deals involve large amounts of money – It pays to watch those financial deals carefully.

That mindset has made most of us at least a bit wary. But consider some situations when a short sale is the smart move for the current owner.

A bank forecloses on a house and small piece of property. The original loan was for $100,000 and the owner has paid only $20,000 on the property. That means there’s an outstanding mortgage for $80,000. The value of the property is still at or above $100,000 but real estate has been rather slow in the area. The bank can easily put the property on the market and wait. They’ll likely get the full value – eventually. This is one case in which a short sale simply makes sense.

The bank is probably not in a position to manage property. The house – while it’s sitting vacant waiting for sale – is costing insurance premiums and bringing in nothing. Meanwhile, the bank is losing even more because the interest on the loan is also on hold. They have money invested, but are making nothing from the investment – until the property sells. If they can make a short sale and get even the value of the mortgage, they at least end the period of losing money on the investment. The short sale may not be the only advantage in this case because the bank may be more willing to finance a new owner, making a great situation for good terms and rates.

Another point of the foreclosure and the short sale is that the borrower who defaulted agreed to pay the amount of the loan and the foreclosure doesn’t change that. Depending on the laws of the state, that may mean that the bank can sell the property with an outstanding mortgage value of $80,000 for only $50,000 and the borrower is responsible for the difference. While it may be an effort in futility to attempt to collect from the defaulting party, it may also be a way for the lender to end a period of losing money.

So does that mean that all foreclosures will result in short sales? No, and it doesn’t even mean that all apparent short sales are good deals. There may be extenuating circumstances, damages or other problems that make the house unlikely to sell for market value. So look the gift horse in the mouth, examine all the angles, but don’t throw the short sale down as a fairy tale before you give it careful consideration.