Boy, have banks been taking a beating. The properties you see advertised as "short sales" are those where sellers are listing their property for less than they owe, and it’s happening more and more.

A short sale is when a property has been sold for an amount insufficient to pay off the existing mortgages. One of the largest real estate transaction attorneys in town told me that as many as 25% of his closings now involve a house selling for less than necessary to settle the transaction.

The lesson is this: Don’t borrow more than you know you can sell your house for, even if the appraiser says it is worth more. If you have to sell because of a new job, divorce, separation, change in family size (or whatever), you may find that your house can’t be sold unless you persuade the bank to take less than is owed or dip into your own funds to pay the mortgage balance.

If you are attempting to purchase a home, smart buyers (and their agents) will do some exploring to make sure there will not be a short sale early on in the process. A short sale can cause delays or even prevent a transaction from closing. Negotiations of a "short sale" with mortgage holders often take weeks to process. Meanwhile, you may be living in your mother’s basement with your stuff parked in a U-Haul in her driveway.

By Mark England