A Short Sale to Avoid Home Foreclosure

If you are looking to purchase a home before it goes into foreclosure, you may be able to arrange a short sale if you play your hand right. A short sale involves selling the home to you at a price less than what the owner owes to the mortgage company. Yes, a loss will be involved with this type of a sale, but a short sale may be agreeable to all parties if you act with wisdom.

That sprawling ranch you have your eye on could fetch $275,000 on the open market. Unfortunately, the market has cooled considerably and homes are taking more than seven months to sell. As you have found out the seller is in distress, so much so that a foreclosure notice has been served and a court date is just weeks away. The seller knows that if a buyer doesn't step forward the court will rule against him, foreclose on the home, and his credit will be trashed.

Because the owner purchased the home only two years earlier with only $10,000 down the value of the home isn't much higher than the outstanding mortgage balance which is currently $248,000. As for you, purchasing the home at that amount isn't quite the bargain you had hoped for. Instead, if you could pay $240,000 for the home you could make some token updates and place it back on the market in a month or two.

Obviously, there is a question to ask: who would be responsible for the $8,000 shortfall if your bid was accepted? Technically, the seller but the mortgage company knows that getting money out of someone who is basically bankrupt would be impossible. Moreover, the seller could sidestep his responsibility by simply filing for personal bankruptcy later. In this case the mortgage company would be left holding the bag.

If your bid is not too far off the mark, the mortgage company may agree to the short sale. Keep in mind that a foreclosed home costs plenty of money to maintain and manage. Furthermore, court costs associated with the foreclosure could run into the thousands of dollars when filing fees and attorney expenditures are figured in. Even though the mortgage company would lose $8,000 on the deal, that loss could be a whole lot less than the expenditures related to a foreclosure.

Ultimately, you will have to win over the mortgage company with the "short sale" as well as the seller. Whatever monies the seller put down will be lost too. However, that might be the price he is willing to pay in order to salvage his already tarnished credit rating.