With the inventory of resale homes in the Phoenix market hovering near record-high levels, some desperate sellers are turning to the "short sale" to stave off foreclosure.

Many people don't know what a short sale is. Neither do some real estate agents.

Short sales can be negotiated when a homeowner owes more on the house than it's worth and can't afford the payments anymore. Reasons can range from a sharp increase in monthly payments because of an adjustable-rate mortgage, to a lack of equity in a soft housing market, to a sudden loss of income.

Experts say the short sale is a last-resort alternative to foreclosure.

"There are a lot of people in desperate situations. They're losing their investment. They're losing their credit standing. Even young families are being put out on the streets. You have to advise them of their options," said Darryl Godwin, an agent with High Profile Realty Advantage in Phoenix.

Because short sales often require extra efforts from the real estate agent -- negotiating with lenders and finding a buyer to purchase the house in a competitive market -- they are reluctant to work on them, especially given the likelihood of lower commissions for more work.

"There's a lot of ignorance and apathy toward short sales," Godwin said.

But he said he's willing to put in the extra work for less as a service to those who need help. Besides, he said, many lenders are happy to accommodate the arrangement to avoid the hassle of foreclosure.

"Foreclosure costs lenders a lot of money, so they generally would rather sell a home for less money and move on," Godwin said.

Although short sales have been around for years, they're a rarity. But one new company is betting they'll become more common, because of increasing foreclosures and the growing inventory of resale houses on the market -- nearly 50,000 in the Phoenix area, according to the most recent numbers from Arizona Regional Multiple Listing Service Inc.

"People don't know that a short sale is an option, and they let it go into foreclosure," said Travis Olsen, president of the National Short Sale Center in Scottsdale.

Olsen said his company streamlines the short sales process by negotiating with the people who can approve short sales and handling the necessary paperwork. By taking a lot of the legwork and hassle out of the process, he said, more real estate agents will do short sales, even at a lower commission.

National Short Sale Center was founded in January 2004. Since then, the company has handled about 100 short sales in Maricopa County and about 1,000 nationally.

"All the Realtor has to do is get a buyer to buy it for market value. We set up all the paperwork," Olsen said.

Many short sales are unsuccessful, he said, because the real estate agents don't know who owns the loan and waste too much time trying to find out. In the meantime, the foreclosure process moves too far along to accommodate a short sale.

"Realtors are turning them away, but by doing that they're turning away a lot of leads," Olsen said.

Nicole Cline of Scottsdale Luxury Properties recently decided to give the National Short Sale Center a trial run.

"It's not something that's taught in real estate school," Cline said. "Once Travis (Olsen) explained the steps to me, I thought it was a great idea. I've completed four short sales with the National Short Sale Center. They have a much better chance of getting a deal done."

Although a short sale often saves a desperate home seller from a ruined credit rating and many sleepless nights, it's not without a downside: Some short sellers receive federal 1099 forms at the end of the year from their lenders, reporting the forgiven debt to the Internal Revenue Service as income.

Olsen said there can be a way around the tax liability, but attorney Bill Kastin of Snell & Wilmer said mortgage conditions vary widely, and the devil may be in the details.

"I would not assume that (the forgiven debt) will not be reported as income," Kastin said. "You could take a big tax hit without any cash to pay it off."

Only a certified public accountant or an attorney with tax expertise can advise a homeowner on the potential impact of specific mortgage conditions, he said.

Still, Godwin said a short sale is far preferable to foreclosure.

"I'm a firm believer that knowledge is power. Getting a short sale done is probably the best option," he said.

BY DEFINITION

What is a short sale in residential real estate?

It is the process of negotiating with a lender or lenders to accept less than what is owed on a property.

What is the benefit to the seller?

It averts the stigma of a foreclosure on the seller's credit report, which in turn increases the likelihood that the seller will be able to obtain credit to buy another home within a couple of years.

What is the benefit to the lender?

Accepting a short sale may be a better financial deal than paying the costs associated with a foreclosure sale, and it allows the lender to get the property off its books.

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