A “short sale” is better than a foreclosure, for everyone

If your house is underwater (the mortgage balance exceeds its market value), and you are unable to keep making payments, then you are headed for foreclosure, unless you do something.   One option, a short sale, is, in my opinion far better than foreclosure — for you and for the bank — and the banks finally seem to have figured that out.

Under a short sale, you sell the house for current market value and the bank accepts the proceeds in full payment of your mortgage.  A short sale is a lot less hassle for you and it brings in more money for the bank than a foreclosure.  Real estate research firm CoreLogic says that short sales result in a 24% discount from the market price of a comparable home, while foreclosures typically sell at a 64% discount.

It’s a win-win-win.  Both the bank and the seller avoid the hassle of a foreclosure; the seller wipes out their debt; the bank gets more money than it would with a foreclosure; and the buyer gets a discount.

The problem is that despite the good sense this makes, banks have been making it tough to do short sales by delaying approvals, discouraging buyers.  Lately however, they seem to be loosening up.  In October, 2012, short sales rose from 8.1% of total home sales to 10.4% while foreclosures dipped to 11.5%, down from 17.3% a year ago and 30% during the depths of the recession.

This does not count smaller programs like “deed in lieu” where the bank accepts title to the home in return for canceling the mortgage.  That is even easier than a short sale for the seller, but it’s hard to get a bank to go along.

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