by Rem

Many hear about the phrase “real estate short sale” and do not fully grasp what it means. 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.

Calling the current real estate market a complete meltdown would not be unfair in some cases, such as in Detroit. Declining real estate markets are the primary reason for the rise in short sale real estate opportunities.

Banks undergo a real estate short sale when they let a property be sold for an amount of money that is less than what it is worth. In order for this to occur, two conditions must be met. Number one, the property’s sale price has to be incapable of covering the outstanding mortgage balance. The second condition is kind of obvious, but it dictates that the owners will be unable to continue making mortgage payments on the property.

As an example, suppose a property was purchased five years ago for 217,000 dollars with an adjustable rate mortgage. 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. The house might also be in a part of the country where the market values have fallen to a low of 215,000 dollars and their interest rates have gone up from around seven percent to up around eleven percent. Add in the additional problem of one of the owners having lost their job, and you end up with a very likely real estate short sale scenario.

For a bank, a foreclosure can mean a lot of time and money spent that a short sale would not. 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. The process can occasionally become complicated, particularly if the owners and the lenders reach an stalemate when it comes to agreeing to terms, but overall, that is how a real estate short sale works.

A real estate short sale is an unpleasant experience for an owner, but it is not the worst thing in the world. If nothing else, it certainly beats being forced to accept a foreclosure on your credit report. On the other hand, a truly savvy investor can take advantage of these short sales for excellent buying opportunities.

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