While short sales are currently scorching the real estate market, foreclosures are cooling down. Steve Harvey, founder and president of the market research program Keeping Current Matters, attributes the trend to a change in the collective business practices of banks.
"At the beginning of the economic crisis, these banks were more punitive in their thinking," he says. "If someone wasn't paying their mortgage, they said, 'We're going to take the house back and go through the process of foreclosure.'" Although this onerous process may have worked well as a punishment measure, it wasn't in the best interest of the bank or the homeowner.
"In terms of the seller, short sales forgive them of bad debt and eliminate the possibility of being sued for deficiency," explains Steve Jacobson, a real estate broker in Denver.
Banks also quickly realized they could make more money – and thus lose less money – on a given property for a short sale than a foreclosure. "The banks' preference for short sales is completely dollar-driven," says Imran Clark, an investor and buyer in San Diego.
Beyond the balance sheet, some experts believe there is a goodwill factor involved. Foreclosures typically involve an official at the door telling the homeowner to vacate the premises, Harvey says: "On a short sale, the homeowner leaves with a lot more dignity."
Property value is another driver for avoiding foreclosure, says Matt Cossell, a short sales expert with Keller Williams in San Jose, Calif. If squatters break into a foreclosed home while it's unoccupied, potential buyers won't pay as much for the property. During the short sale process, sellers usually remain in the home until the escrow date, so the property typically is well-maintained.
"These homeowners essentially stay there for free," Cossell says. "And for those in a tough financial situation, saving up that money can really help."