Pre-Foreclosure Definition

Pre-Foreclosure - Short Sale

By Editor ⋅ March 12, 2008 ⋅  Email this post ⋅  Print this post ⋅ Post a comment

Another technique often used by investors is the short sale.  Essentially, they work with you and the lender to negotiate a discount off the amount due to the lender. The lender may agree to this if they determine that they would lose even more money by going through with the foreclosure.  For example, if the house is in disrepair, or the loan to value amount is extremely high, the lender may just want to take their loss, write it off, and move on. If the lender agrees to the sale, a contract for the lower price would be approved by the lender, and they would simply reduce the payoff due to them at closing. 
This seems like a good option for you as there will not be a foreclosure on your credit!  However, there is a big gotcha here - ask the investor to try to negotiate as part of the deal that there will be no deficiency – that is, the lender cannot subsequently sue you for the amount they lost, leading to a judgment against you. Otherwise, you might end up owing the lender for that “reduction in price” after all. In my state of Texas, the amount is limited to difference between the fair market value on the home and the amount of the short sale. If the amount is small enough the lender might choose not pursue a deficiency judgment – but don’t take any chances.  Ask the investor to get the lender to agree in writing to forego a deficiency judgment, otherwise you could be liable for that amount.