Short sales can occur when an owner's mortgage balance is greater than the property's market value, and subsequently a sale for less than the amout owed is negotiated not only with the buyer, but with the seller's lender.

The reason this subject is still popular is the fact that nationwide, about 25 to 30% of all homeowners are "underwater" on their mortgages.  Of course not all these owners have their places on the market, but we could speculate that of all those who are selling, the same proportion of scuba divers applies.

Why would anyone want to sell under these onerous circumstances?  Because they must for one reason or another, not the least of which is impending foreclosure.  The latter does far more damage to one's credit than a short sale.

To get to the point of my enlightenment:  I knew that under the terms of the Colorado Foreclosure Protection Act, only a property owner or a licensed real estate broker can perform a short sale.  A broker listing a property that becomes a short sale can actually negotiate with the seller's lender on their behalf.  Unfortunately, the process is long and complicated, and there have been many cases where a buyer's offer has been unable to close since the seller's lender was dragging their feet on approving it.

What I did not completely realize was that 1) even a successful short sale will leave a mark on your credit, with your lender still being able to come after you in terms of a deficiency judgment; 2) there are unscrupulous "investors" out there who will purchase a property as a short sale, then immediately turn around and resell that property for a tidy profit at the same closing!  They have no money in the deal, but earn whatever the difference happens to be.  This is known as a "double closing with dry funding," and most upstanding title companies won't do them; 3) as real estate brokers, we can't give you legal or tax advice regarding a short sale, wet or dry!  No matter how much you beg, we'd be risking our license if we advised you on these matters. 

So if we can't really tell you the best thing to do other than in the context of plunking a For Sale sign in your front yard and making unending phone calls to your banker, how do you know the best thing to do?  The answer to to consult with your friendly neighborhood tax attorney.  I understand that he or she will probably charge for such a consult just when a distressed seller can least afford it, as the one thing I know about attorneys is that unlike real estate brokers, they hate to work for nothing.  But there are good ones out there, including bankruptcy lawyers.  Bankruptcy may be an option which could save a drowning owner, but as a broker, I can't legally advise an owner to do that (can bankruptcy actually stop foreclosure?).  A loan modification may also be a good alternative, but I can't suggest that either (and this program has been plagued by fraud and delay).

But if you are a troubled seller and contact me, I'll refer you to a few bankruptcy attorneys who do free consultations.  If you're underwater and the sharks are circling, you need to be proactive!  As a real estate broker, I can also advise you to contact the Colorado Foreclosure Prevention Hotline @ 1.877.601.4673, or the HUD Counseling & Referral line @ 1.800.569.4287.

Paul Hill