When homeowners in foreclosure run out of options that would let them keep their homes, many decide to sell. The problem they run into, though, is that they owe more on their home than it is worth, and no potential buyer is willing to pay tens of thousands of dollars above the market value. In this case, a short sale may be the perfect solution, but the possibility of fraud has been contributing to lenders' reluctance to approve offers.

In a typical short sale, the homeowners provide an appraisal or Broker's Price Opinion (BPO) to the mortgage company to prove that the property is not worth as much as they owe on the loan. This is to convince the bank that it is better to approve the short sale offer, accept less than the total amount owed, and get as much as they can for the property. This can be an effective solution to foreclosure if the numbers make sense to the lender.

Unfortunately, the same speculators, investors, and other home buyers that relied on deception and fraud to obtain mortgages during the real estate boom are now engaging in the same tactics to defraud banks in short sale transactions. During the bubble, appraisals were often inflated, using the highest comparable sales, even if the compared properties were not in the same town or were built decades apart, for instance.

Now with the collapse of the housing market, this fraud is being reversed. The people selling are offering appraisers or real estate brokers fees to create the appearance that a house is worth far less than its true market value. Comparable sales with low values will be used, and any defects of the property will be highlighted when presenting a short sale offer to the bank.

But this deception makes it easier for those who get away with the fraud to sell their home through a short sale to a friend or family member and end up with a much lower mortgage balance. The bank may accept $50,000 less to avoid foreclosure, but the homeowners stay in the property and make rental payments to whomever purchases the house through the short sale. They may save hundred of dollars a month in payments.

While this tactic is perfectly legitimate and may work for many homeowners who are facing a financial setback that changes their long term income potential, the deception practiced on the bank is still counterproductive. It may work in some individual circumstances, but it makes the banks more wary of accepting short sale offers from other foreclosure victims.

And with fewer short sale offers accepted, more properties will go into foreclosure, which will drag down property values even further. People that have a short sale approved through fraud may find out in several months that they are back in the exact same position of owing more on the home than its current market value justifies. Of course, this situation will require another manufactured BPO and short sale offer.

One of the main concerns of homeowners facing foreclosure but considering a short sale is any potential income tax liability. There are numerous horror stories of families whose lender allowed them to sell for tens of thousands of dollars less than what they owed but were then sent an IRS form at the end of the year indicating they had to pay tax on all that forgiven debt. But the IRS is not such a scary institution, and foreclosure victims may not have to worry about paying extra tax just to save their homes and their credit.

The main benefit of doing a short sale is that it can reflect better on a homeowner's credit record than letting the house go through foreclosure or giving the bank a deed in lieu. Selling the home, even at a discounted price to the lender, shows other potential creditors that the borrowers attempted to make as good on the loan as was possible at the time. But the threat of having to pay thousands of dollars in income tax to accomplish a short sale could eliminate the credit score advantages if the owners are forced to declare bankruptcy to deal with the taxes.

The government's regulations on this issue are not at all intuitive. After all, how can the bank willingly forgive a portion of the homeowners' debt, but the homeowners have to treat this as actual income and pay taxes on it? One of the points of the short sale is to save money when homeowners in foreclosure can not afford to pay thousands of dollars in missed mortgage payments, attorney fees, and court costs. To impose another bill for thousands of dollars on them at the end of the year seems a cruel joke by the lenders and the IRS. Two conditions, however, must be met in order for the IRS tax liability to be triggered.

First of all, the tax liability from forgiven debt is not triggered with debt that was used to purchase or improve a primary residence. This means that homeowners who negotiate with the lender to lower their original mortgage that they used to buy the home will not have to pay taxes on this forgiven debt. The same applies for borrowers who took out a loan or refinanced in order to improve the house.

But when a loan is taken out to purchase a second house, consolidate debt, pay college tuition, or for any other purpose besides buying or improving the primary residence, the IRS may come into play in a short sale. The IRS treats any of this forgiven debt as if the bank gave the homeowners money, which the owners then immediately used to pay down the loan on the house. Thus, the borrowers are forced to pay taxes as if they received the money from the bank as regular income.

Homeowners, however, can avoid paying the tax if they can prove they were insolvent at the time of the short sale. This is often not difficult at all to prove, as insolvency merely means that the borrowers' total debts were more than the equity they had in their home and personal property. With property values declining by 40-50% in some areas of the country, many borrowers owe more than their home is worth and have little in the way of personal property to make up how much the value of their house has fallen. The banks have made the entire housing market insolvent.

But despite being insolvent or having used the proceeds of a loan to improve upon on a primary residence, homeowners who execute a short sale to stop foreclosure may still get a 1099 from the bank at the end of the year. It can be completely wrong, but the lender may still send it. In this case, homeowners can file the IRS Form 982 in order to reduce the amount they owe. Borrowers may also wish to speak with a tax professional when filing their income taxes if they had done a short sale and received a 1099 form showing income.

Homeowners who have the option of completing a short sale in order to avoid foreclosure may be better served by saving their home in this manner. Although there are a few drawbacks of a short sale, it is almost always better just to resolve the mortgage entirely and move on with fewer financial worries.

First of all, when homeowners complete the short sale, they will not have to pay the difference between what they owed originally and what the bank accepts. This counts as forgiven debt and is the main reason for doing the short sale. When property values decline, selling at a high price is almost impossible, and families in foreclosure have no other option for selling their home than to convince the bank to accept less.

However, borrowers may have to pay taxes on the difference, because the IRS treats any forgiven debt as income. But this does not count if the amount forgiven is higher than the market value of the home (when the property is underwater). If a family owes $125,000, but the bank accepts $100,000, and the home is now only worth $100,000, the borrowers will not have to pay taxes on the $25,000 forgiven debt.

The special tax form homeowners will receive from the bank at the end of the year is a 1099, which will list how much income the banks counts that the foreclosure victims received from the short sale and forgiven debt. To determine how to report this to the government, homeowners should talk to their tax preparer about how to count it in income, or read the IRS website for more information on how to treat it.

Another benefit of a short sale is that homeowners can not be sued or have wages garnished by using this method to stop foreclosure. The bank forgives the debt, meaning it is agreeing to release the lien on the house for less than the total amount owed. So the lender is unable from that point to sue the clients for a deficiency on a debt that the bank itself accepted and agreed to a deficiency on.

However, if the property went through a normal foreclosure, the bank may be able to sue the borrowers again after the sheriff sale, depending on the circumstances and the state foreclosure laws. Almost no banks, though, do this, as they figure there is little chance they will be able to collect on any future deficiency judgment against foreclosure victims.

Nor can the bank, as a result of the short sale, put a lien on any other home the borrowers might own. Any part of the debt that is forgiven is no longer owed to the bank -- it accepts the lower amount in return for releasing the lien and not pursuing foreclosure. So homeowners do not even owe the mortgage company any more money once the bank accepts the short sale.

Although banks may not be willing to work enthusiastically with homeowners during a short sale process, persistence pays off. This option will allow more people to escape from a house without the threat of a foreclosure on their credit or the fear of the bank hounding them for a deficiency judgment for years to come. If saving the home some other way is not an option, and market values have declined to make selling difficult, a short sale may be a good compromise for borrowers and lenders.

Although selling a home at a short sale to avoid foreclosure can be a mutually beneficial solution for both homeowners and banks, many lenders are quite reluctant to allow this method. More common than simply turning down an offer is when a bank delays the process for so long that the original sales contract expires and the buyers and sellers decide to give up on the process.

One reason for this may be that lenders believe there are better alternatives to foreclosure that would allow them to keep more of the balance they are owed on the mortgage. While some homeowners are unsure of which options they may qualify for, it should be the responsibility of the bank to propose other solutions if they believe the owners to be rushing into a short sale without all the facts. Simply delaying the process, giving no answers and no advice, is extremely unproductive and will only further damage the owners' financial position as they accumulate more missed payments.

Another problem, of course, is the large number of homeowners facing foreclosure. Not only the subprime market, but also the prime mortgage market, are facing larger than expected foreclosure rates. The effects of the suprime market going bad have created a drag on housing prices, which are effecting even homeowners with good credit who run into a financial hardship and are unable to sell or refinance due to the high balance they owe own the mortgage compared to the shrinking value of the property.

With the proliferation of second mortgages and home equity lines of credit, negotiating a short sale can become quite complicated. These types of loans were pushed on nearly every homeowner as a way to tap into their increasing equity and treat their properties as if they were credit cards or ATMs. Now that access to these lines of credit are being restricted, homeowners who relied on them to finance large expenses or businesses have an even more difficult time working out solutions to foreclosure.

Unfortunately, it seems that there are far more problems in working out short sales now, despite the fact that they could benefit both buyers, sellers, and lenders. The reluctance by mortgage companies to consider these deals, though, means that no one wins in the end, if the home is taken all the way through foreclosure and sold at county auction. In these cases, it is not uncommon for banks to relist the properties for sale on the market for even less than the amount they were offered for the short sale.

When short sales work, they can provide homeowners with an extremely efficient solution to foreclosure. After all, everyone is relatively happy in the end: the bank gets the foreclosure off their books, the homeowners get to avoid sheriff sale and eviction, and the new buyer gets a house for a deal. Often, though, banks have the most to lose from from a specific short sale but are the very party that sabotages the process.

With houses falling into default in such large numbers due to the subprime crisis and decline in property values, banks seem to have become paralyzed about attempting short sales. They turn down reasonable offers only to be forced to foreclose on the house and then list it on the open market for a price even lower than what they were offered for the short sale.

Mortgage companies are turning down deals that would get them some money to pay off these foreclosed loans and help their clients who can no longer afford the payments. Instead of jumping on such offers, the banks spend more money on their local attorneys to foreclose and then on local real estate agents to sell the property. In the end, they lose even more when property values decline and homeowners damage the houses, so they have to list the properties for even less than they were originally offered.

Banks are shooting themselves in the foot in order to avoid helping any of their clients stop foreclosure through the use of a short sale. They know all of the risks of homeowners going into foreclosure: property values decline due to a glut of homes on the market, homeowners may take revenge on the house, court costs and attorneys fees will be paid out of pocket by the banks, and so on. These banks were so responsive to the housing market when creative loans were all the rage, yet they are unable to respond to the fallout of these flimsy excuses to give anyone who could operate a pen a mortgage.

Simple incompetence does not explain this failure by the banks; corruption, criminal activity, and a wealth transfer are far more likely. First of all, the banks would have no reason to request bailout after bailout from the federal government if they were actually helping to alleviate the mortgage crisis. By turning down short sales, banks do not have to take a 15% or 25% or higher loss on the loan -- they can let it go into foreclosure, then trade that mortgage debt at face value for US Treasury securities.

Even with the homes being offered for less than the bank could have gotten from a sheriff sale, the lack of available credit will make purchasing a home more difficult. With so many properties on the market, buyers will not have to settle for damaged, abandoned homes in suburban ghost towns, and they will not be able to get a mortgage to finance the purchase anyway. Property values will have to decline even further and banks will take less on these houses if they ever sell.

One thing is almost guaranteed: the banks are setting up for another criminal leveraged buyout, such as the one used in the Bear Stearns deal, but on a much larger scale. Foreclosures are piling up while money is being directed into the Government-Sponsored Enterprises like Fannie Mae and Freddie Mac, which are also in serious trouble due to the foreclosure crisis. Is the unwillingness to help homeowners use short sales a part of the plan to pump and dump the GSE's and transfer even more public and private wealth to prop up the increasingly insolvent banking system?

One of the methods that homeowners use to save their homes from foreclosure that is quickly gaining in popularity among foreclosure victims and lenders is selling the property at a short sale. Although the option has been around for decades, the current environment in the real estate market has made the method particularly attractive, because it allows owners to sell for less than the total amount they owe on the loan. This is especially helpful now, as home values have been in decline and many loans were taken out at 90-100% loan-to-value.

Nearly five million households may be facing foreclosure in the next two years, which will contribute greatly to an overall decline in property values. These distressed properties must be sold for an amount to encourage a quick sale to stop foreclosure, but this may be impossible if what is owed on the mortgage exceeds any reasonable estimate of what the home could sell for. With the distinct possibility of a recession in the economy this year, even more layoffs and corporate bankruptcies will be announced, which will only contribute to the number of properties being sold.

For most homeowners, selling for less than what they owe may not be the most preferable solution to the foreclosure. It is, however, much better than going through the entire foreclosure process through the courts and sheriff sale, and can have positive impacts on the former owners' credit once the sale is completed. Instead of a full foreclosure showing on the credit history, the mortgage will be reflected as having been paid off and closed, but with a settlement accepted for less than the total amount. Obviously, this is not as good as paying off the mortgage in full, but it is far and away better than losing the home to a foreclosure auction.

Lenders are more willing to consider short sales when they are sure that the property will not sell for very much at auction, and the amount they are being offered for the short sale is more than they can expect from the sheriff sale. Foreclosure is an expensive process, usually costing in the range of $50,000 per case, but a short sale cuts the foreclosure off before the process has gone all the way through, thereby saving the lender some of its costs. It also has the luxury of working with the homeowners directly, rather than paying their local attorneys to file more paperwork in court or request the county government to enforce judgments.

Allowing the homeowners to sell at a short sale also saves the bank from having to take back control of the property if there is no other buyer at the auction. Banks are often the high bidder at county sheriff sales, even though they offer only the minimum required opening bid. Their goal is to get the property ready to be sold through a local real estate agent on the open market and regain some of their lost profits through the sale. If they can avoid that through the use of a reasonably-priced short sale, many of them will take that opportunity.

The main group of homeowners that should consider a short sale are ones that have little or no equity in their homes, and can not find a better way to stop foreclosure before they run out of time. Refinancing is often not a possibility when there is negative equity, and bankruptcy may come with a prohibitively expensive payment plan. If the bank is not willing to work out a repayment plan or mortgage modification because there is not enough income to qualify, then selling the home may be one of the only options left to the owners to escape the worst consequences of a foreclosure.

When homeowners attempt to sell their house for less than the total amount they owe on it, certain tax liabilities may be triggered. This is one of the reasons that every foreclosure victim should carefully consider whether selling their house short is the right decision for them, and what other options may be available. The danger of getting an income statement on an IRS 1099 form at the end of the year for thousands of dollars may result in a higher tax liability than the homeowners originally anticipated.

Essentially, being 1099'd means that the homeowners, after the short sale has been used successfully to stop foreclosure, will be responsible for paying the taxes on the amount of debt that the bank forgives in order for them to proceed at all with the sale. Taxes would only have to be paid on the amount forgiven, not on the contract price, final payoff amount, or foreclosure judgment.

For example, if the foreclosure victims owe $150,000 on the mortgage, but the bank accepts $100,000 as their final payoff in order to facilitate the short sale, the difference of $50,000 is the amount that is counted as "forgiven debt." The IRS considers this $50,000 as if the bank gave the homeowners a gift for that amount, which was immediately used by the owners to pay down their mortgage. Therefore, taxes would be due on the amount given by the bank.

The homeowners would be responsible for paying taxes on the $50k, at whatever their marginal tax bracket will be that year. There are ways to get around this, though, such as if the homeowners are insolvent at the time of the sale. This means that, when the short sale went through, they owed more on the mortgage than the home was worth. To better understand the issues that may affect the tax liability on a short sale, it might be worth visiting the IRS website or consulting with a CPA to find out more before closing on the deal.

But the bottom line is that the homeowners facing foreclosure will only get a 1099 if the bank forgives any of the debt owed to them and allows the short sale. It will not be an issue if the house is otherwise disposed of, even if it is sold at a county sheriff sale for less than the total amount of the foreclosure judgment.

When the house is auctioned off at the sheriff sale, the bank does not forgive any of the debt. They are just using the legal mechanism of foreclosure to force the sale of the house and get back as much as they can. All that the bank has in this case is a loss, so there will be no income to the homeowners that can be considered as forgiven debt. The bank would not be able to show that the foreclosure victims received income in this form when the owners did not voluntarily sell the property and the mortgage company did not voluntarily forgive any of the debt. No voluntary agreement to take a lower payoff equals no forgiven debt equals no extra income tax liability.

Since the whole foreclosure process is coercion by the state to sell a property to enforce a contract, a sheriff sale would not be an event that triggers extra income to the homeowners. A short sale, though, can be an extremely effective resolution to stop foreclosure, especially in the type of real estate market as exists right now. Many homeowners are underwater with the equity in their homes, and they are much more likely now to fall under the insolvency exclusion than they were even a few years ago during the real estate boom.

Homeowners who have examined numerous options to save their homes and have not found success should begin to consider selling outright. Sometimes the best solution is to give up the house and begin planning for the future of their families, especially if it will be prohibitively expensive to find some way to avoid the foreclosure. Losing the home is clearly a stressful experience, but using a short term "band aid" and holding onto a home that will only be kept out of foreclosure for a few more months before being lost is a much worse solution. But even selling the home outright may not be enough, if the mortgage on the property is now more than the value of the house. In this case, a short sale may be appropriate.

However, foreclosure victims who wish to save their homes should take every step necessary to prevent the foreclosure. If they are intent on keeping the house, then there are numerous options to stop foreclosure that may be considered. Unloading the property, though, is a much better alternative to being forcefully removed by the sheriff during the eviction process. But once homeowners have attempted every solution that they are qualified for (and even some they are not), it may be time to move on and consider selling the house through a short sale.

The best way to sell a house is generally through a local Realtor with low fees who understands the situation or for the homeowners to list on their own. That way, commissions can be kept as low as possible, allowing for a more attractive selling price and for the homeowners to keep as much of the proceeds as they can. Selling the house and ending up with even a small amount of equity is always a better result than listing the house for too high of a price, not being able to sell at all, and having the bank take the property to a sheriff sale. When this happens, the homeowners typically end up with nothing, as the house will not sell for an amount necessary to pay off the defaulted amount.

If the homeowners do decide to attempt selling the house, the mortgage company may give them extra time to find a buyer. It is important to contact the lender once all other options have been exhausted, so that they can postpone a sheriff sale or hold off on any other foreclosure proceedings.Mortgage companies are more interested in getting their loan paid off, and it is in their interest to allow for extra time to list a house on the open market. If the house was taken to sheriff sale and the bank was the high bidder, they would end up listing the house anyway, after the eviction process had been completed. The homeowners listing the house while they are still the owners may cut down the time that the bank has to deal with the property, as well as ensure their loan is paid in full or for an acceptable amount.

Often, though, properties in foreclosure do not have enough time to sit on the market for months with an asking price equal to the value of the home. This is one reason that banks will consider short sales in many instances. A short sale is an arrangement whereby the mortgage company accepts less than the total owed on the loan, and is usually approved if the value of the property has decreased, and there is no way the sellers would be able to get a buyer to pay more than the market value. Even in cases where the loan is not higher than the value, banks may accept a short sale, because there is a high possibility of them losing even more money if the house has to be sold at sheriff sale and then sits on the market for months.

Homeowners who attempt a short sale and find a buyer need to be aware that they will most likely end up with nothing for the sale. Other than the foreclosure process being stopped and being able to make a clean break with the property, there is no benefit to a short sale. The lender will certainly not want to see the homeowners getting some sort of financial benefit beyond a few hundred or a thousand dollars for moving expenses. Furthermore, any debt that the bank forgives (the difference between what the homeowners owe and what the bank actually accepts as a payoff) is counted as income to the foreclosure victims. This means that they may have an extra tax liability at the end of the year because of the short sale.

Thus, a short sale can be a remarkable solution for homeowners who have tried various options to stop foreclosure and have been unsuccessful. It provides a solution even when selling the property for exactly what is owed is not possible -- the bank can actually accept less than what is owed and help the homeowners to unload the house and avoid a full foreclosure. But the drawbacks of the short sale process should also be considered; namely, that the homeowners will not be able to benefit financially from the sale, and they may even have a tax liability for the short sale. However, when all else has failed and the lender is willing to work with the foreclosure victims, a short sale is a much better solution than a sheriff sale and eviction.

For years, self-proclaimed real estate gurus have been teaching wannabe foreclosure investors on how the short sale process works, and how to identify desperate homeowners whose lenders are in a position to consider the possibility of allowing the foreclosure victims to sell their homes with the bank taking a loss. These types of deals have received a lot of negative feedback recently, due to criminals using unscrupulous tactics to trick homeowners into believing in false promises of being able to keep their homes and stop foreclosure, when all the short sale professionals are really doing is grabbing as much equity and cash as they can from the foreclosure victims before they move onto their next target. However, this type of deal, when done correctly, can put the homeowners and the investor into a much more mutually beneficial situation.

These type of deals are not illegal, but some unscrupulous investors set up homeowners in payment plans that are simply unaffordable. They know the foreclosure victims are desperate to save their homes and they take whatever option they can get to avoid foreclosure.

The concept of doing short sales and sale-leaseback or sale-buyback deals is not illegal in itself. The illegality comes in how some investors proceed with the deals. Real estate investors do deals like this all the time, whether it's to help families with poor credit or to generate income for their own portfolio, or whatever. Owning a property and leasing it to someone with a valid contract is completely legitimate and legal and happens every day.

The problem comes with investors who arrange deals that are most definitely not in the clients' best interest. This usually includes taking a lot of equity as a fee for doing the deal, or setting up a payment that is too high for the renters/buyers to pay. Then the deal can be qualified as a loan and thrown out in court, because no one is legally allowed to give a loan to someone knowing that they can not pay it back. In some cases like this, the homeowners will sue the investor and the courts will declare the leaseback an illegal loan that was designed to take the collateral. Far too often, this is true, because some investors target homeowners in desperate situations like this.

The government lets it go on because there are a lot of legitimate investors who do similar deals and they can not restrict trade deals like this. They can prohibit the clearly predatory deals and try to protect homeowners, but they can't just ban a completely legitimate transaction. And they certainly can't ban seminars that teach the concepts of this type of deal. Most of the seminar "gurus" don't advocate taking advantage of homeowners, in any event.

So make sure that the investor that homeowners choose to work with put together deals that are completely legal and the clients are able to make the payments, based on their current income. The foreclosure investor obviously can not predict if they will lose a job or face medical problems in the future, but should ask for income documents that will prove the homeowners bring in enough money to make the buyback payment without using all of their monthly income. Investors who do not attempt to prove the foreclosure victims can actually make the payments may just be interested in stealing the house and evicting the former homeowners.

Sale-leasebacks with homeowners in foreclosure is just one option that can be used to stop foreclosure, and, with any solution, the details are the most important. Homeowners should also look for other foreclosure advice to determine which option to save their home is the most appropriate for their specific situation. No option is the magic bullet, so to speak, but a combination of options, carefully considered, can result in the foreclosure victims getting a fresh start after foreclosure and remaining in their homes.

Short sales to stop foreclosure are one of the most misunderstood and difficult solutions to save a home that exists. With so many different variables involved and various self-proclaimed gurus teaching people how to do short sales, there are a lot of ways that homeowners and investors can go wrong in a situation involving a short sale.

One issue that has come up is the possibility of a homeowner doing a short sale with the property that is in foreclosure and actually selling the property to themselves. This is, of course, impossible. The reason is that the bank and title company and county would not like that at all, or ever agree to allow this situation to happen. Since the property is not actually changing hands, it is not even really a sale. Homeowners who speak about selling their home at the short sale to themselves seem to be trying to get the lender to modify the terms of the loan and disguising it as a sale to themselves.

If the foreclosure victims are still intent on pursuing a short sale as an option to stop foreclosure, they should attempt selling the foreclosed property to an investor or a friend/family member with a different last name, who can then sell it right back to the original property owners. This is always a possibility, but with tighter lending regulations right now, it may be more difficult for anyone to get approved for a loan without having a down payment of some sort and decent credit.

Selling the home to someone else who can then sell the property to the foreclosure victims is a much more viable solution to foreclosure than short selling the property to themselves, which is simply impossible. As an alternate solution to foreclosure, they can just ask the lender for a mortgage modification and see if they approve the homeowners for one. That may lower their monthly mortgage payment or help them get back on track with the current mortgage company, if no one can purchase the home.

In any situation involving foreclosure where the homeowners are intent on saving their home and keeping it, there should always be a focus on making sure the homeowners end up with an affordable monthly payment. If they agree to a payment that is too high, or one that they know they will fail on, there is no reason to pursue any option to stop foreclosure. In this case, it may be wiser to sell the property or give it back to the bank using a deed in lieu of foreclosure. But a short sale is one of the most useful, if misunderstood, methods that a homeowner can use to save their home and avoid foreclosure. Of course, every homeowner should seek as much foreclosure advice as possible before making a decision on any option they are offered.

We've been busy all day and all week getting a few new foreclosure loans closed for some of our clients, so there may not be any substantial blog posts for the next couple days. To make up for the lack of posts on how to stop foreclosure, though, we've added a few links to some interesting foreclosure/real estate articles.

'Upside Down' Home Sellers Owe More Than They Get

A home has been on the market for nearly half of a year, while the owners watch prices steadily decline. Because of how much they owe, the homeowners are unable to lower the asking price of the property. However, they are unable to afford the payments any longer. They seem to be in a lose-lose situation: they can't sell the property for its value, because values have dropped and they owe too much; and they can no longer afford to keep the home. So what should homeowners in this common situation do to prevent foreclosure proceedings from being started on the house?

Usually, if the owners are not able to keep paying the mortgage, and a reasonably lower rate wouldn't fix the situation, then a short sale with a local real estate investor may be the best option if they are just attempting to unload the property or are interested in remaining in the home. This involves finding the purchasing investor, and then staging a joint negotiation with the lender for a lower payoff amount on the loan. This negotiated amount is usually based on the value of the home and a fair sales price of the property.

Obviously, the private investor and homeowners would not want to give the lender a ridiculously low offer, but the bank should be willing to consider anything that is reasonable. For homeowners who are already in some stage of the foreclosure process, the lender may have already done a comparative analysis of the property and has determined their own estimate of value. In fact, they may already be aware what their requirements are for a potential short sale to avoid taking a loss on the property.

For homeowners in these types of situations, the best idea is usually to find a local real estate investor or other buyer who could purchase the property for less than what is owed on it, thereby helping the owners stop foreclosure, and helping the lender by paying off the defaulted loan for a reasonable price. Once an investor is found, the homeowners can show the bank that they are working on a solution to save their home; the lender may give their clients more time to work on a plan, even going so far as to postpone a sheriff sale or foreclosure auction. This gives the investor and homeowners more time to work out a mutually beneficial solution to stop the foreclosure process.

Only if the deal falls through or the lender rejects the short sale offer, should the homeowners pursue other, less attractive options. These options may be refinancing through a traditional or hard money lender for a high interest rate, working out an expensive repayment plan the homeowners may be unable to keep up with, or voluntarily give the property back to the bank via a deed-in-lieu of foreclosure.