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Joan Peaslee, a top-selling agent at Prudential Slater James River, had never dealt with a short sale -- until this year.

"I didn't even know what one was," said Peaslee, who has been selling real estate in the Richmond area for more than 20 years.

Short sales involve selling houses for less than what is owed on them. As the housing slump lingers, short sales are emerging as an alternative to a foreclosure.

Sellers can move on with their lives and avoid the stigma of a foreclosure. Lenders can take their losses and be done with it, steering clear of the arduous and costly foreclosure process, real estate experts say.

As many as 18 percent of all U.S. home sales in March were short sales, according to an informal poll by the National Association of Realtors. Short sales are so new that there is not much data beyond that.

But their use is growing in the Richmond area, local real estate experts say.

Requests for short sales have doubled from a year ago, said Jason Spooner, senior vice president of defaults for SunTrust Mortgage Inc. in Richmond.

"As a tool belt, short sales will be with us in 2008 and 2009," Spooner said. "I don't think it's a bad thing. . . . At the end of the day, the last thing we want to do is foreclose."

The slow real estate market has pushed down prices, putting some people upside down in their mortgage loans -- unable to sell their houses for what they owe.

Some homeowners behind in their payments simply throw in the keys and let the lenders foreclose. Short sales give them another option. But they are not easy. Mortgage lenders must approve short sales, so they are complicated and take more time than sales with clean titles and transfers.

The prolonged downturn opened the way for short sales. A temporary change in the tax law has spurred their use as well.

When lenders forgive debts on principal residences, borrowers no longer have to pay taxes on it, according to legislation signed into law in December by President Bush. The change is effective through Dec. 31, 2009.

. . .

Todd Poole is trying to work out a short sale with his mortgage lender.

He bought a big, beautiful Queen Anne Victorian in the Barton Heights neighborhood in North Richmond for $285,000 at the peak of the housing boom in April 2006.

Poole, an attorney, moved to Atlanta for a job and put his house on the market in January for $324,950.

When the house didn't sell, he lowered the price to $299,000.

The house is on the market now for $224,950 -- $100,000 less than the original asking price -- and Poole still has no offers. His mortgage is for $285,000.

That doesn't include the $30,000 he and his wife put into the house in new copper flashing and privacy fencing.

"We put everything we had into that house. It's our dream home. In a different neighborhood, it would be worth a lot more," he said.

Poole, 31, said he is trying to get approval for the short sale, but the process is tedious and involved. He said he will allow the house to go into foreclosure if the bank does not agree to the short sale and forgive the remaining debt.

"I would like to work with the bank to reduce their loss and to reduce mine," he said.

His credit report will be harmed with a short sale but not as much as it would with a foreclosure, real estate experts say.

Peaslee, the agent who relisted the house at the reduced price, said the short sale scared away one potential buyer.

"The stars don't align with a short sale," she said. "We don't know what price the lender will take or how long it take to get an answer."

She said a streamlined process with a bottom price would make it easier for all involved. "I like very straightforward, clean deals."

. . .

A short sale can take as much as 90 days longer than a typical sale, said Lem Marshall, special counsel for the Virginia Association of Realtors. Even then, there is no guarantee it will go through.

Short sales were not done in general during the housing-related recession in the early 1990s because the downturn was shorter and less severe, he said.

Marshall has been conducting courses on short sales for agents across the state since August. "There are so many out there," he said. "Everything is different than in a typical resale." Plus, there are legal and ethical issues.

With so many houses on the market, why bother with the hassle of a short sale?

"Buyers get a deal," Marshall said. Houses sold in a short sale can go for 60 percent to 75 percent of the value, he said.

Sellers may be able to salvage their credit from ruin and lenders can avoid paying taxes and maintenance on another repossessed property.

Lenders may forgive the debt and write it off as a loss. Or, they may require the seller to liquidate other assets to make up the balance of the loan.

"Some lenders forgive debt, some don't," Marshall said.

"If the seller is driving a new $40,000 car, he will need to sell it and get a clunker and give the lender the difference. But usually the seller has been picked clean at this point."

. . .

Some people considering short sales may have used all the equity in a home by taking out second loans. Others took out mortgage loans for more than the house were worth, based on appraisals that were fudged to get higher sales prices.

Whatever the situation, it didn't matter -- provided that real estate prices continued to rise. If homeowners got into a bind and couldn't make their mortgage payments, they could sell their houses and pay off their debts.

That is no longer the case in many areas. Nationwide, prices have fallen 20 percent from a year ago and continue to drift down.

Although the decline in the Richmond area has been modest, Northern Virginia has seen a steep drop in prices.

"This market is unique; we haven't seen anything like it," Marshall said.
Contact Carol Hazard at (804) 775-8023 or chazard@timesdispatch.com.