When you optimistically took out your loan to buy your home, it is likely you were thinking the market would continue on the skyrocket incline that was true well into 2005 in San Jose and the South Bay, as well as much of the state of California. Downtown San Jose condominiums provided a great investment opportunity, as did nearly every single family residence. Then you may find yourself in a bind. Many variable-rate interest loans bumped up in 2007 and will continue to bump up in 2008. In fact, loan payments may double as homeowners come to terms with interest rate increases.

Then the market in downtown San Jose, Santa Clara County and surrounding communities begn to experience sluggish action and less of a seller’s market environment. In some cases, sellers fall behind on mortgage payments. Home sellers do not have to foreclose. You can make specific, tailored arrangements with your lender to sell the home for the present market value. The bank will take a loss but you will be released from the weight of the loans. And you do not have to experience a foreclosure or a bankruptcy.

A short sale is when the amount of the loan is higher than the market value of the home. The true market value is defined as the amount someone is willing to pay for your home right now. It’s not what you would like to receive, or what your neighbors received for their home a few months ago. The true market value is not actually known until your home is on the market and valid offers arrive!

Your realtor may prove of great help to you during this process of selling for less than you owe on your home. Your realtor will step up and apply for the short sale paperwork with your lender. Then, when you receive an offer, your realtor will run it by the bank for approval. The major difference in a short sale scenario is that the seller doesn’t control exactly the terms of the home sale. The offer must go to the bank for a green light to sell your home. The advantages are many! You are released from your home loan debt. You are released from further marks on your credit. You do not have to declare bankruptcy or go through a foreclosure. The hard part to take is that you are not leaving your home with cash to buy your next place. So it is a bittersweet victory. Look to your realtor for assistance through the process.

You see short sales in declining markets. You also see short sales when the home owner has taken a large home equity line on the home, expecting the prices to climb and cover the difference between the home value and the home sale price. In downtown San Jose and surrounding South Bay communities, real estate prices are slightly lower now than any time in the last two years. This is an opportunity for buyers to get a great price on a home or San Jose condominium – because the seller may need to sell and the bank may wish the homeowner sells before going into foreclosure.

For homeowners who are having a lot of trouble paying the mortgage, a short sale provides a tool to sell the home without going into foreclosure or bankruptcy. For example, let’s say an ambitious home buyer in 2006 paid $400,000 for a downtown San Jose condominium. Let’s say the buyer paid for the home all in loan with no cash down. That is an example of 100 percent financing.

Now let’s say that homeowner cannot make the payments, and falls three or four payments behind. To ward off foreclosure, the seller makes an arrangement with the bank. Realtors are helpful for coordinating these efforts. The realtor lists the home for $400,000 and doesn’t get a nibble. Now, the realtor may drop the price to let’s say $378,000. This is a short sale! The sale price is not as high of an amount as the debt on the home. The bank may accept as low as $350,000 or $325,000 as months go by – just to be compensated for some part of that loan. As a buyer, this is a great opportunity to get in and purchase a home for less than market value.

What to look out for: buyers may want to make sure that they are financially prepared to manage the full mortgage payments for the foreseeable future. Buyers may opt for a 30-year-fixed loan opportunity to lock in the home payment well into the future. The safest way to buy in a declining market is with 10 percent to 20 percent down payment – because this will protect you from going into a short sale yourself in the future! Good luck home shopping. It is a great time to invest in San Jose condominiums, single family homes, or multi-family residential units. Rents are remaining constant and prices are dropping. Short sales are a great way to get in the door.