Short Sale: a Foreclosure Alternative

Chris Heagerty
Prudential Arizona Properties
August 2007

Valley residents who lost their homes to foreclosure tripled since last year from 1,073 in all of 2006 to 2,954 through June of 2007.  Foreclosure is a losing proposition for both the homeowner and the lender, who sometimes can lose as much as 30-60% of the loan's outstanding balance. 
 
A Short Sale is a workout alternative to foreclosure.  If a home owner in pre-foreclosure has secured a purchaser, his lender may be willing to take less than what is owed and allow the homeowner to sell a new buyer at a loss.
 
For example, if a homeowner owes $250,000 on his mortgage and a buyer makes an offer of $200,000, the only way the homeowner could sell would be to make up the $50,000 difference in cash.  On a short sale, the lender would agree to accept the loan payoff of $200,000 and forgive the homeowner the $50,000 shortage.  The homeowner who escaped foreclosure would then have tax consequences.  IRS would regard the debt forgiveness as income.
 
Not all loans can be sold on a short sale.  Lenders package their loans in bundles. A homeowner's loan which is part of a loan package where 50% are in default would be a more likely candidate for a short sale.
 
If foreclosure is imminent, ask me to work with you and your lender on the possibility of a short sale in place of foreclosure.  Each loan, lender and circumstances is unique.