Scanning the Southern California Multiple Listing Service (MLS) last week, the one thing that stands out is the growing number of short sales. Last year, you rarely saw the phrase “short sale” in the MLS property description. Today, approximately 10 percent of the listed properties are short sales.

That indicates lenders are getting more eager to unload properties in foreclosure, even if it means selling them for less than is owed on the mortgage.

Short sales occur when home prices fall and mortgage debt exceeds the value of the property. A short sale refers to a situation where a homeowner lacks sufficient equity to close a transaction and asks the lender to accept less than the full mortgage balance for a loan payoff. If the lender agrees, homeowners can sell their depreciated home and settle their debt for a reduced sum. If a short sale doesn’t work, it eventually becomes a bank-owned foreclosure.

Nobody keeps statistics on how many short sales close each month, but based on anecdotal evidence they are increasing at an alarming rate. While short sales remain a small segment of the residential real estate market, the increase bears watching for investors, buyers and real estate agents.

Short sales are a sign that rising foreclosures are beginning to put a strain on the market. Nationwide, a total of 130,511 new foreclosure filings were reported in January, a 19 percent increase from the previous month and a 25 percent increase from January 2006, according to ReaaltyTrac’s U.S. Foreclosure Market Report. January’s total was the highest since RealtyTrac began issuing its report in January 2005. That translates to one new foreclosure filing for every 886 U.S. households.

Rather than getting stuck with non-performing mortgages, lenders are making deals with investors to substantially discount these loans below the amount of the loan itself. For investors and home buyers, purchasing properties at this discounted price can be a great money making opportunity.

With millions of subprime loans readjusting to a higher rate this year, there will be an increasing number of people who cannot afford to make higher loan payments. If the number of foreclosures continues to climb, there will be a steady stream of short sale business during a market downturn. Learning how to negotiate short sales can be a lucrative source of business.

To learn more about short sales, visit our Foreclosure Bookstore.