According to a statement by an executive vice president at Global Insight, one-quarter of homes for sale by December 2008 could be bank-owned. Foreclosures depress any market and in a decreasing market, an increasing number of home sales are short.

Short sales simply mean that the seller owes more on their mortgage than the home is currently worth. Short sales aren't appreciably different from any other sale with one exception -- contingencies regarding lenders for both the buyer and seller.

In other words, the offer by the buyer and acceptance by the seller is only good if the seller's lender is on board with taking less money than it's owed.

Many real estate agents have never seen a short sale before and are confused about what to do.

Arizona broker Bob Stephens of West USA Realty has some suggestions:

1. Disclose, disclose, disclose. Stephens says the fact that a seller is short must be disclosed to the buyer. If both agents want the transaction to go smoothly, it's wise to get the seller's lender on board before the purchase contract is written.

   One way to do that is for the title company or attorney that will be handling the transaction to communicate with the loss mitigation department of the seller's lender to start the process with a "buyer to come" notification.

   To get the ball rolling, the seller must give permission to the bank to communicate with the listing and selling brokers.

2. Document, document, document. The seller must prove hardship and document why he or she cannot pay what's owed to the lender including W-2s, bank statements, hardship letter, and other proof of inability to pay.

   The seller must realize by reading and signing the short sale addendum to the sales contract that the short sale doesn't absolve them of all responsibility for the debt. Short sales may affect their credit scores, and some lenders may not forgive the entire debt, requiring the seller to pay the difference as a personal debt. FHA or VA loans may also require repayment in full. There may also be tax consequences -- the IRS requires a 1099 from the forgiving bank so the amount will be on record and must be declared by the seller at tax time.

3. Try, try, try. . In short sales, the seller nets zero, because all the proceeds go the seller's bank. Their incentive is to get out from under increasing debt.

   Lenders don't want to become homeowners, and if they can avoid foreclosure, they might mitigate their losses. However, the short sale won't happen unless the lender releases the lien and the buyer can have clear title in order to place a new lien on the house. Therefore, all liens must be found and paid, including HOA fees, second liens, equity lines of credit, and so forth, so no other lien holder can come in and spoil the deal.

Says Stephens, "There are misconceptions that the sellers lender seems to be the only one that has any power. Yes, of course they have some but then so does the buyer's lender. The buyers lender makes loans as a business to make money. The sellers lender wants to make the deal so they don’t have the great expense of foreclosure. Too many foreclosures and they will have a real problem getting their loans insured."

That's why short sales could be the short cut to getting many markets back on track.

Published: June 4, 2008

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.