the role of equity in foreclosure and short sales.

[William MacBride]

Hi
I'm just getting into this and trying to clarify the basic cash flow patterns of the foreclosure and short sale market. Bear with me because I'm a real newbie. Let me start with a hypothetical situation.

Somebody takes a mortgage for 300, 000 dollars out to buy a nice house. They make their payments ok until they've achieved 100 thousand dollars of equity. They still owe 200 grand, and suddenly they lsoe their job and can't make any more payments. They start getting notices from their lender that their property is going to go into foreclosure.

The way I understand the short sale deal is that their lender agrees to take 150, 000 for the house instead, to save them time and hassle and fees for auctioning the house off. But the individual in foreclosure can't pay them this amount of money. That's where an investor comes in with the money and either buys the house himself, or flips it quickly making say 10 grand.

Now- what I don't understand is why the owner of the house can't just skip these middle men and sell the house himself. I mean if the house was worth 300 grand when he bought it, it should AT LEAST be worth the 150 or even the 200 that he owes right? Hell it might even be worth more than the mortgage he took out.

It's referred to as an "upside down' situation when the owner can't expect to make as much from sale of the house as he owes the lender, but I just don't really see why this is the case. Wouldn't prices have to fall very sharply to create this situation, and even if he'd only paid off a little of the mortgage wouldn't he still be in a fairly good position?

If anyone can clarify this I'd appreciate it.

Thanks a lot,
Will