When it comes to housing, there is not another area of the country harder hit than Phoenix so chances are you have heard of a short sale. While you might recognize the term, few people outside the real estate sector actually have an understanding of what a short sale is and is not. Quite simply, a short sale is a real estate transaction where a homeowner sells a home for less than what is owed to the lender(s). The lender(s) in turn agree to release the seller from the terms of the original mortgage. What a short sale is not is short in how long they take to complete.

With a short sale, sellers avoid having to go through the emotional upheaval of a foreclosure while preventing the devastating impact it can cause to their credit. Many times when an individual short sells a house, he/she can often purchase another home within 12 to 24 months due to the minimal damage to their credit. In a foreclosure, it may be as long as 5-7 years before a mortgage with competitive rates can be obtained. Regardless of how one feels about this subject it is clear that if we want to dig out of this real estate market we can all agree we need more buyers. Another benefit to the seller is that there is no out of pocket expense for closing costs including commissions.

Clearly, the biggest advantage to homebuyers is the prospect of moving into a property at below market value. Moreover, buyers normally find that short sale properties have the added benefit of being in much better condition than 90% of REO’s on the market. We have all heard about the foreclosed properties that have been damaged by the sellers, many with no kitchen, damaged pool equipment, missing A/C units, and worse. In contrast, most sellers trying to sell their home as a short sale have a vested interest in maintaining the property. As such, they leave their property in much better condition. Because the property is in good repair it sells for more, which obviously helps property values for everyone.

Of course, mortgage lenders also benefit. The average loss for a lender on a short sale is 19% versus over 40% in a foreclosure reaching as high as 60% for properties in Phoenix. Additionally, with a short sale, lenders don’t have to worry about getting involved in a long foreclosure process, which can cost tens of thousands of dollars in attorney fees, insurance, property taxes, utilities and other holding costs. Multiply this cost by the hundreds of thousands of foreclosures happening every week and it is easy to see why the banks are still neck deep in red ink. Beyond the exorbitant cost lenders face with a foreclosure, the dominate reason banks do not want any more homes back is the havoc it creates on their balance sheet, which can cause insolvency. Just ask Indy Mac!

The biggest benefit may be the one that rarely is mentioned in the media and that is the benefit short sales can have for our communities. Instead of a vacant house with weeds knee high, missing appliances and a mosquito-infested pool, we have a new homeowner eager to improve the property and help our community and local economy thrive again. Furthermore, our neighbors who were once drowning in a mortgage they no longer could afford are able to find a rental property and go from struggling non-spenders, to thriving customers for our local businesses.

For the record, the majority of people who lose a home to foreclosure or who turn to a short sale as a means to relieve their financial nightmare have been devastated by an unforeseen hardship. This is usually an event out of there control like job loss, health issues, death of a spouse, or a job transfer, that has placed them in a position they couldn’t imagine. If you haven’t been impacted by this economic downturn be thankful, but also find compassion for your neighbor who has not been as fortunate.

Sincerely,

Robert Holt and Phil Mills of The [HOLT] Group, RE/MAX Sonoran Hills