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The "Short Sale" and How It Works

The term "short sale" is being used with more frequency as real estate prices decline and some property owners struggle to make mortgage payments. A sale is "short" when a property owner must sell a property for less than the amount owed to the bank. The sale comes up "short" and the bank may agree to accept less than the amount owed if a bona fide offer to purchase the property is presented.

Lenders will only agree to a short sale under certain circumstances. Accepting immediate cash in a short sale may be seen as a better alternative than a foreclosure. Foreclosures are costly, as the lender must pay for maintenance, security, insurance and property taxes until a buyer for the property is secured. During this time, the property value may continue to decline, and the lender could end up receiving less for the property than was offered in the short sale opportunity.

Because of the complexity of the issues involved, the short sale process often does not live up to its name – a short sale can take a long time to materialize. The lender wants to recoup as much as possible from the transaction, but it is not in the business of buying or selling properties. When a potential buyer makes an offer in a short sale situation, the lender must evaluate the local real estate market, including making a judgment as to value, the level of foreclosure risk and the estimated cost of a foreclosure before accepting or rejecting the offer. Any junior lienholders must also approve the offer. Buyers must exercise patience when making an offer to purchase a "short sale" property.

For now, the short sale process is one method by which lenders can address the rising number of delinquent loans.

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