Divorce, loss of income, job transfers and over extended credit have put many homeowners in a precarious financial position. When real estate values were escalating sharply, most people facing these problems simply sold their homes and paid off their loans. Now, with declining real estate prices and lacking any equity, they are unable to pay their loans in full.

Desperate to minimize the negative effect losing a home will have on their credit, many homeowners are attempting what are known in the industry as "short sales." Encouraged by real estate agents and news media reports, financially troubled home owners are jumping on the short sale bandwagon.

A quick search of the Sutter-Yuba Association of Realtors' MLS system for the term "short sale" reveals this;

83 Homes currently listed for sale
59 expired or withdrawn listings in the last 12 months
11 closed sales in the past 12 months

There has been a lot of buzz over short sales but for all the hype, only about 8% of the short sale attempts have been successful. Even the successful short sale sellers receive questionable benefit. Ken Noall with CenPac Mortgage and both Arla Chalmers and Tim Dalske with Countrywide Home Loans agree that there is no difference between a foreclosure and a short sale in terms of it's negative effect on a client's credit.

The situation is only made worse by the lack of knowledge exhibited by many of the real estate agents that are listing these homes for sale. I talked to an agent last month to set up a showing of a well priced home listed as a short sale. During my discussion with the agent, she said she had received four offers but none had been approved by the seller's lender. She also said that, from her dealings with the lender, one thing that had become clear. The seller's lender would not approve a sale for much, if anything, less than the listed price. Within a week after I showed this home, two new agents had the listing and a $40,000 price reduction!

In this situation, a price reduction hurts everyone. Other agents and sellers, unfamiliar with all of the details, could have mistakenly listed their homes too cheaply thinking they were competing against this home for prospective buyers. My client was upset with me when she saw this lower price because she felt that I hadn't represented her best interests in telling her the home was a good value at the higher price. Finally, it almost guaranteed that this home could not be sold as a short sale because sellers' lenders refuse to approve sales below fair market value. Not surprisingly, this home was foreclosed on and is now listed for sale with a third firm at a price slightly higher than the first agent had it listed for.

One agent bills herself as a short sale specialist and claims a 75% success ratio getting short sales approved. A search of her listings over the past year reveals 20 short sale listings. Of this number, she has closed only two sales!

Another consideration is that short sales and foreclosures have tax implications. Is it recourse or nonrecourse debt? How much, if any, will be treated as capital gain? Even if it qualifies as your personal residence, some of the sale price will probably have to be treated as normal income. It gets complicated so homeowners facing a short sale or foreclosure should visit their accountant for advice.

Sadly, short sales have been very ineffective at solving the problems of sellers facing foreclosure. Another option, known as a deed in lieu of foreclosure, might be more effective. This option won't work in every situation and, as with short sales and foreclosures, it has tax implications. However, it will be faster than either a short sale or a foreclosure. To the extent that it is faster, homeowners will be able to minimize the number of late payments on their credit report. It will also be less complicated and less stressful than a short sale. Homeowners, facing foreclosure, would do well to explore the possibility of just giving their home back to the bank.

2

2

1440

$149,500

$145,000

3

2

1653

$299,900

$290,000

2

1

950

$200,000

$165,000

3

2

2100

$309,000

$293,000

3

1

864

$187,000

$170,000

3

2

1693

$289,000

$294,000

3

1

1008

$194,900

$194,900

3

2

1900

$324,500

$300,000

2

1

918

$215,000

$215,000

4

2

2098

$324,000

$309,000

2

1

1400

$213,000

$217,000

4

2

2019

$329,900

$309,500

3

2

1294

$226,500

$219,000

4

2.5

2188

$344,197

$315,000

3

2

1487

$269,900

$222,500

3

2

1710

$329,000

$327,000

4

1.5

1800

$279,000

$250,000

3

2

1768

$339,000

$329,500

3

2

1176

$249,900

$254,700

3

2

1908

$328,500

$330,000

3

2

1281

$265,000

$255,000

4

2

2098

$359,000

$335,000

3

2

1512

$330,000

$259,000

3

2

2000

$339,900

$335,000

3

2

1523

$305,000

$262,000

5

3

2336

$330,900

$340,000

4

2

1776

$274,500

$268,000

3

2

1779

$397,000

$345,000

3

2

1306

$259,900

$269,700

4

3

2138

$365,000

$345,000

4

2

1662

$285,000

$277,500

4

3

2177

$364,950

$356,000

3

2

1660

$299,000

$280,000

4

2

2127

$379,000

$379,000

3

2

1613

$280,000

$285,000

4

3

2528

$395,000

$380,000

3

2

1451

$289,000

$285,000

4

3

2378

$429,000

$425,000

3

2

1745

$315,000

$289,000

4

3

3212

$799,000

$525,000

3

2

1690

$299,900

$290,000

4

2.5

3705

$720,000

$540,000