The term short sales may not be well known outside the real estate industry, but this is changing. With foreclosures and job loses increasing, many homeowners can no longer pay their mortgages. For many persons in these situations, short sales are a way to avoid the embarrassment of foreclosure and bankruptcy. In fact, short sales are quite common to avoid a financial disaster.

Short sales are a process where a real estate agent works out an agreement with a bank or lending institution to take less than is owed on a property. In short, the lending institution forgives the difference between the selling price and the actual debt. So, if $420,000 is owed on a house and it sells for $400,000, the $20,000 is forgiven. Banks often lose much more in foreclosure than in a short sale.

This is a last ditch effort taken to avoid foreclosure. It is a gamble that home owners take to maintain their credit rating or at least reduce the damage. For a short sale to work, the homeowner must be able to prove financial hardship. Financial hardship results when a homeowner cannot pay their mortgage and begins to fall behind. Things that may bring about financial hardship are job loss, divorce, death or major illness.

While short sales may be a good way to avoid foreclosure and financial disaster, it is important to note that it may also fail. Ways in which short sales may fail include the following:

* The deal takes a long time to close. When this happens, the bank may run out of patience and foreclose anyway or still demand the shortfall from the sale.

* A failure to agree to terms of the short sale by all parties.

* Having an inexperienced agent do the negotiating. Not all real estate agents are knowledgeable about short sales.

Despite the fact that short sales may fail it is worth exploring as a way out of a difficult situation. Banks and other institutions accept short sales as it allows them to remove bad debts from their books. Short sales reduce the level of loss a mortgagee suffers as against the cost associated with foreclosure. Since banks are not in the business of owning homes, it's in their best interest to cut their losses and dispose of property, especially in bad economic conditions.

Short sales also aid homeowners and they can generally get a new mortgage within one to three years after a short sale. This is much quicker than they lost the property through foreclosure or had to file for bankruptcy.

In negotiating a short sale, it is important to include a clause that the outstanding amount will be forgiven. Unless this is done, the homeowner may still have to find the balance after the short sale. This would negate the attempt to protect credit score or avoid bankruptcy.

It is also important to know that there is no guarantee that a bank will go for a short sale. Such arrangements are generally done on a case by case basis. In fact there are certain criteria that must be met for successful short sales. Some of these are:

* Proving financial hardship: the homeowner's real estate agent will prove this by providing financial information such as bank statements, tax returns, income statements

* A hardship letter which explains how the homeowner got into the financial situation they are facing

* The acceptance that the property owner will receive nothing from the sale of the house

* In most cases of short sales, there is a document outlining the current status of the housing market. This is often referred to in the industry as a comparative market analysis

While nothing compensates for losing a home, short sales may offer a solution that other options do not offer. Just be sure that you do the necessary research before progressing and get a Minnesota, Minneapolis real estate agent who knows about short sales.