When foreclosure is looming for a homeowner, the short sale can be a creative solution.  Simply put, a short sale occurs when a lienholder or lienholders agree to take a lower payoff than the principal owed to them.  The short-sale scenario may be caused by excess fees and late charges that have been levied, closing costs and commissions due, back taxes, 2nd and 3rd mortgages, or even 100% interest only mortgages granted just before declining market values hit the U.S. home market.  The bottom line is there is no longer enough equity in the home for a traditional sale where seller either breaks even or received proceeds from closing, after all costs and lienholder charges have been paid. 

Per Colorado legal counsel John Goodman (www.frascona.com), here are some basic requirements that should be present for a short sale to be possible:
1. Seller should have a low remaining asset base and weak family support to avoid a settlement judgement.
2. Seller's loan must be in default.
3. Need a contract with contingency in the contract stating lender approval(s) required, and in Colorado a commission short payoff addendum.
4. Buyer must be patient, as it normally takes 2-3 months to get the lienholder(s) approval.
5. Want a seller that has moved out of property, or that has a compelling reason to move.

All Sellers in a short sale position are advised to seek legal counsel and financial advice from a CPA. While the broker or agent can bring an offer to purchase to the lienholders, either themselves or through a third-party negotiator, and can provide estimated payoffs with the title company, the broker or agent is neither your attorney nor your CPA.  The decision to take the short pay ultimately goes to the homeowner, who should receive disclosures on short sale ramifications and the process, and should be counseled until the deal closes.  From a short sale, there may be tax consequences to the Seller, or even continued indebtedness unless otherwise negotiated with the lienholders, so counseling is necessary.

Brokers should be careful to maintain the proper relationship with each party involved in the transaction, so as not to overstep their duties.  The recommendation of legal counsel to the Selling party should be a primary directive from the Broker. And the use of an experienced third-party negotiator, or referring broker with experience is also highly recommended.  Time is of the essence, and those with experience know the process of the short sale, and have the lienholder contacts and relationships necessary.

Why is this a possible win-win situation for Seller and Lender?  The Seller may indeed end up in better credit condition without the foreclosure showing up on future lending applications.  And the Lender most likely will end up with more proceeds from a short sale than a foreclosure, given that many foreclosure situations may garner only 70% of the market value, as buyers of bank owned (REO) properties expect a "great deal" well below market value.  As a foreclosure, the property has somewhat been devalued to prospective buyers, as the property is usually winterized and cleared of all appliances, and oftentimes even lighting fixtures are even removed, putting the property in an "as-is" sale condition.

Matt Evans is a Broker Associate at Keller Williams Realty.  Matt is licensed in both Colorado and Indiana, focused on the Northern Colorado and Northwest Indiana markets.  Matt Evans may be reached at 970-215-9221 or www.mattevansrealestate.com.