In the past if you mentioned “short sales” many people would look at you like you were speaking French (even those savvy to real estate investing), but not so much these days. Short sales are becoming more and more common, as they deal with pre-foreclosure situations where a borrower and lender are looking for any way possible to avoid facing the ugly situation of foreclosing on the property.

Short sales are really pretty simple. With foreclosures on the rise and lenders and banks suddenly ending up with more and more properties on their books, they’re increasingly willing to bypass the whole expense and hassle of foreclosure proceedings and willing to sell the property for less than the full amount of the mortgage owed. Since they’re selling it for less or an amount “short” of the full amount of the mortgage, these are called “short sales”.

Why would a lender ever agree to accept less than the amount legally owed to them? With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property, including legal fees, court costs, interest payments that they’re not collecting, property maintenance, and commission and other selling costs. If that weren’t bad enough, foreclosing on a property can also take up to two years in some states, so it’s both a costly and time-consuming process. And, in areas where property values continue to plummet, they lose additional money for every month the property sits on their books.

So should every investor pursue short sales? Not necessarily, as they can be a headache, depending on whether the lender is willing to be flexible and truly consider short sales. Lenders tend to require a lot of information from borrowers who are trying to unload their house and avoid foreclosure via a short sale, including (but not limited to):

• Income documentation
• Bank statements to verify assets
• Hardship letter
• Fair market value for the property
• Listing agreement and purchase agreement when they are available

Like any aspect of real estate, short sales can be very profitable for investors but they carry the same risks that buying any property does, as just because you’re getting a property for less than what’s owed on it doesn’t mean that it’s necessarily great deal, especially if someone bought at the very top of the recent speculative bubble.