“Real estate short sale” is a very popular concept at the present. If you read the newspapers, or turn on the TV and the odds are high that you will come across stories about declining real estate market conditions and the increasing willingness of banks and other financial institutions to consider real estate short sales as an alternative to foreclosure. Real estate prices are lower now than they have been in a long time and the amount of time it takes to sell a piece of real estate is rising. Throughout the country the crisis is so bad that many places are experiencing what is fair to call a market meltdown. It is because the market is so inhospitable that the need for short sale real estate has gone up so dramatically.
A bank allows a real estate short sale to occur when the bank consents to letting their property be sold for an amount smaller than the amount owed on it. There are two different conditions that must be in place before the banks will agree to this. Number one, the property’s sale price has to be incapable of covering the outstanding mortgage balance. Secondly: The owners find themselves unable to continue to make mortgage payments on the property.
For example, a property that was purchased five years ago with an adjustable rate mortgage for 217,000 dollars. The owners decided two years later that they needed a second mortgage of 10,000 dollars, bringing their total to 227,000 dollars. Home owners typically have made only a negligible dent in the amount of money that has gone towards paying off their debt in five years. We’ll also imagine that the property value has decreased to 215,000 dollars while the mortgage interest rate has increased from seven to eleven percent. Finally, add the fact that one of the owners has just lost her job and the makings of a real estate short sale situation become apparent.
In avoiding time delays and expenses, the bank will probably decide to go with a short sale. This is because the banks believe it is better to accept a definite amount of money now than to wait on an unknown amount of money that may materialize in the future. If the lenders and owners do not agree on the terms of the sale, complications can result, but in general, that is how the real estate short sale works.
While a real estate short sale is an unfortunate and unpleasant experience for an owner forced to go through the process, it’s not the end of the world. This route may not be perfect but it’s better than having a foreclosure on one’s credit report. For the intelligent real estate investor, however, it can represent a great buying opportunity.