As we’ve all read and heard, the overall real estate market is improving – slowly and steadily – but a shift is underway. Real-estate data firm RealtyTrac, which specializes in foreclosure information, has released its 2012 U.S. Foreclosure and Short Sales Report and it indicates that short sales are supplanting foreclosure-related transactions (in this example – in the state of CA).

A short sale is, in essence, a kind of foreclosure without the the bank getting stuck with the property. It also, statistically, generates more money for the bank compared to a foreclosure, because they do not incur legal costs, rehab costs, holding costs, and even further opportunity costs of their capital. In a short sale, the lender agrees to accept less than what’s owed on a home — but the homeowner (their RE Agent) locates a willing buyer. One thing I’ve learned from closing nearly 500 short sales and having a current pipeline of many more, is that the process can take a while. But for borrowers who are underwater on their loans a short sale can be one way out of a bad financial situation. It can also delay the foreclosure process, generate money for the seller at closing (between $3k – $35k), and mitigate the overall negative effects on one’s credit (compared to a foreclosure).

RealtyTrac reports that short sales boomed during the third quarter of 2012. They increased 20 percent from last year and accounted for 14 percent of all residential sales. Today, we see statistics stating the foreclosures are down a whopping 17% since last year! This is due in part to short sales preventing them.

But the dreaded fiscal cliff could “stifle this trend,” RealtyTrac’s Daren Blomquist said in a statement. That’s because the Internal Revenue Service can forgive the difference between what short sellers owe and what they sell for. But if we go over the cliff, the IRS could ding them come tax time. We are set to do so at the end of this year, so now is the best time ever to short sell.

– Jeff Grant, President,