Especially with the current depressed economy, short sales are becoming more and more popular with real estate investors. Simply put, a short sale is a sale that is allowed by a lender for less than is currently owed on the property. This is generally done when owners are far behind on their mortgage payments and there is little hope of them being able to bring the loan current. Many banks will consent to it because, in the case of pre-foreclosure homes, it prevents having to go through the legal expense of foreclosure. In addition, foreclosed properties cost the banks a lot of money in upkeep and taxes until they can be sold.
Short sales used to be a relatively rare occurrence, but now that thousands of properties are in foreclosure or pre-foreclosure with few buyers, the lenders are becoming much more compliant. Homes that sold in 2006 for over $300,000 are, in some cases, selling for just barely over $100,000 on the open market. However, for anyone who has the money this is a prime time to buy with an eye to holding the properties until the market improves.
Lenders may share information about pre-foreclosures in which owners are three or more months late on their payment and have already received a notice of foreclosure. A potential buyer may offer the lender a sum less than the amount owed and, if the lender is agreeable, may purchase it with the permission of the current owner.
This can save the current owner a lot of money and headache with legal fees, time to leave the premises can be negotiated, and in some cases the new buyers have chosen to allow the previous owners to stay as renters. For the lender, though it may mean a small loss, it means that the property will not be a burden to the financial institution.
In many cases lenders will permit short sales not only to keep from going into red ink, but to ensure profitability of the property on their end. The first several years of any mortgage payments are mostly interest payments, so in that the financial institution may not even be taking a loss. Additionally, many times the mortgage to the new owner goes through the same financial institution, ensuring they continue to collect interest on the same property. Overall, short sales can be beneficial to everyone involved, though the process of offers and permissions may take some time.