What is a Real Estate Short Sale Anyway?

My prediction for 2008 is that the short sale will become one of the hottest topics in the world of real estate. Of course, I don't have to be a wizard or gaze into a crystal ball to see this future. All you really have to do is look at the numbers.

We now have an unusually high number of people going into foreclosure in the United States. This is partly due to the subprime mortgage crisis that started to emerge last year, and it will probably continue for at least another two years.

Here's more evidence of the trend. Last week, I went to my local Barnes and Noble bookstore to look for books on real estate short sales and similar topics. I figured they would at least have one or two titles on the shelves, with more titles available online. Much to my surprise, I had to choose from about 15 books on buying homes through short sale and foreclosure auctions.

Barnes and Noble is stocking their shelves with these foreclosure-related books (some even a few years old) because they know that everyone wants to know about this subject right now. After all, we are a nation built by entrepreneurs, are we not?

So what is a real estate short sale and how can you use it to buy a home for less than market value? To answer this question, we have to look at the typical process of a home going into foreclosure (keeping in mind that this process varies from state to state).

Three Choices for Homeowners

Generally speaking, a homeowner facing foreclosure can take one of three paths. They can either...

Get caught up on the mortgage payments and keep the home
Find a way to sell the home before they go into foreclosure
Allow the bank to foreclose on the home

The first option is obviously the most desirable. If at all possible, the homeowner should try to get caught up on missed mortgage payments in order to keep the home. Real estate is one of the best investments you can have, so you shouldn't let it slip away without a fight.

The last option is obviously the least desirable. Nobody wants a foreclosure to go on their credit history, because it will make future home purchases / mortgage approvals more difficult.

The Real Estate Short Sale Option

In the middle of the road, we have the real estate short sale technique. This is a way for the homeowner to sell the home quickly in order to avoid a complete foreclosure of the home (something to be avoided at all costs). With this approach, the lender gets some of their money back, the homeowner avoids foreclosure, and somebody gets a good deal on a home.

How does the buyer in a real estate short sale typically get a good deal? Because of the very nature of the short sale. Through this process, the lender agrees to let the homeowner sell the home for less than the amount the homeowner still owes to the lender. Naturally, this often means that the home will be sold for less than market value as well.

Why would the lender do such a thing? They do it because they want to sell the home as quickly as possible to avoid losing any more money from the nonperforming loan. The lender also wants to avoid foreclosing on the home, because that means they will have to manage and sell the property (or pay somebody to do that for them). So the real estate short sale is a way to get the loan off their books quickly, without having to go through the extensive process of foreclosure, real estate auction, etc.

So as far as terminology goes, you can think of the short sale as a way to sell a pre-foreclosure home ... and the real estate auction as a way to sell a home after it has been foreclosed upon. Both of these options might be a good investment opportunity for the savvy investor, but the short sale is more streamlined and direct (avoiding the possibility of auction with multiple bidders driving the price up).

This investment potential, combined with the fact that we have record numbers of foreclosure homes available right now, is why you will hear a lot more about the real estate short sale in 2008. And now, whenever somebody asks you what is a real estate short sale ... you'll be able to tell them.