But what if the market is declining at 2% a month (or $12,000) and they price at $600,000 and don't sell for 30 days, so they lower the price to $588,000. But since the market is declining they are still priced above market value, so another 30 days goes by, they still don't sell, so they lower the price to $576,000. This is called chasing the falling market. If they had priced at $588,000 in the beginning they would have been more likely to sell, and now they wish they had priced there or even lower, because the days of getting those values are gone. In a falling market like this, the rule of thumb is price 5% below the most recent comparable sale. So in this scenario they would have priced at $570,000 and very likely sold in 30 days. Unfortunately, too often what happens is seller says "we must sell our home for no less than $X,xxx otherwise we will not get enough money back out . . . but what they need has ABSOLUTELY nothing to do with what the market will bear . . . so they stick their head in the sand and hold fast to "what they need," meanwhile the market falls further and further away. That has happened to MANY sellers in the past couple years. Shame on their Realtors for not having the courage to give them the "bad news" right upfront. If their Realtor did, and the sellers didn't listen . . . it's time to face the music.

Short Sale:

The owners owe more than the market value of their property. After close of escrow, they will have to bring money to pay the lender and/or the Realtor and/or the title and & escrow company.

For example, let's go back to the scenario above. We dropped to $576,000 but if the home sold for that amount with a 7% cost of sale or $40,320 the sellers would get $576,000-$40,320=$535,680 . . . Wait a minute the outstanding loans are $540,000 the sellers are $4,320 short! Therefore there would typically only be one choice, bring that cash from savings to the closing to pay the lender. The lender forgives their debt and their credit remains spotless. But what if the sellers don't have $4,320? Or what if instead of being that amount short, they are $40,000 short and don't have that amount of savings? There are only choices, default on your debt and let your home go into forclosure, the worst hit the person's credit rating can possibly have . . . or convince the bank that in fact you don't have the savings, that yours' is a true hardship case, and that it's better for the lender to lose $4,000 or $40,000 than completely walk away from your obligation to pay the lender. The lender is certainly NOT going to forgive a portion of your debt if you have $100,000 in a 401K or other investments.

Foreclosure:
This only happens when the sellers/borrowers stop making payment on their mortgage for 90 days. At that point most lenders will send a "Notice of Default," also at that point the borrower's credit has dropped into the 500's making it all but impossible to refinance or get a new home loan through conventional sources. In most cases, 90 more days after Notice of Default (total 180 days) the lender can send a "Notice of Trustee Sale" which announces the date on which they will be selling the home at auction, typically within 2 weeks of the notice. In most counties those bidding at the auction must have cashiers checks for their exact winning bid amount to purchase the property, they bid without being able to inspect the inside of the property, and they are at risk for any other tax, contractor, or other liens against the property . . . if there was ever a case of "buyer beware" this is it. The original "owners" are borrowers in default who will most often be evicted by the party buying the home at auction. But often homes don't sell at these auctions because those biddings are not willing to pay what lender wants. That brings us to our final scenario . . .

REO's (Bank, Real Estate Owned):
Let's go back to the Distressed Sale scenario above. Let's say the sellers keep chasing the market down and let's say that after 3 months they realize they are going to have to bring $40,000 to closing if they sell their home. They don't have that much money, so they apply to the lender for a short sale based upon hardship, they are granted it, but because they had an adjustable rate mortgage they can no longer afford the payments, after a couple months of trying to pay while trying to sell their home, they give up on making payments . . . unfortunately the house never sells, so 180 days later they receive a Notice of Trustee Sale, 2 weeks later it goes to auction, no one buys it . . . it is now the bank's property, the original owners are evicted . . . and the bank hires a Realtor to sell the home, typically as is. Most often the banks look at every penny at this point as just increasing a loss, so they turn off the power, the water, etc . . . the lawn turns brown, toilets start looking funky, etc . . . The bank appoints a clerical worker to oversee one more in the 1000's of properties in their inventory of homes they now have cumulatively lost millions on, and now own. By the way, the money the bank lent for the mortgage to the original home buyers/owners is a debt they (the lender) must repay at some point to the depositors who trusted them to hold their cash and eventually return it in full plus interest.

(source: Carson)