Need Foreclosure Options? Short Sale Your Home

Even if foreclosure numbers for Colorado are inflated, there’s no disputing that the state is experiencing a softening real estate market, which is bad news for those trying to unload their homes quickly.

But some desperate homeowners are discovering they might have an option other than foreclosure. It’s called a “short sale,” and refers to the process of negotiating with a lender or lenders to accept less than what’s owed on a property before the home goes into foreclosure.

A short sale involves a financially strapped seller who owns a house that has declined in value. Also, the sum of the encumbrances — such as a second mortgage — against the house exceed its current market value.

Timing is almost everything in executing a short sale. A lender won’t even consider negotiating one until the homeowner is a month or two behind on payments. On the other hand, waiting three or four months might be too long before initiating the short-sale option. A foreclosure sale already may be in the works.

Short sales, nevertheless, are difficult to execute, requiring a combination of patience, determination, creativity and luck. For the seller, the first step is finding a real estate agent who’s willing to do a short sale, often forgoing the customary commission, and who knows the territory.

While short sales are usually preferable to a foreclosure, they aren’t without risk. A lender who accepts a short sale later may seek a deficiency judgment against the seller for the difference between the loan amount and the sale price, but fellow REALTORS have rarely seen that happen. The lender also may file an IRS 1099 form, reporting the amount of the loan deficiency as income to the seller.

I can’t be sure what the consequences are down the road, so sellers need to seek legal counsel. However, most sellers who sell successfully by way of short sale are just tickled pink that they sold their home.