An Impartial Look at Real Estate Short Sales
A short sale is the sale of a home in which the proceeds fall short of what the owner still owes on the mortgage. Here’s an example of such a situation:
Let’s assume that a home owner, Mary, has debt on a house that’s greater than the amount for which the property can be sold. In fact, Mary has an unpaid loan balance of $160,000; however, the property will only sell for $140,000.
Naturally, this isn’t a great situation for Mary, but it isn’t good for the lenders, either. They’re losing money! So, the lenders are reluctantly willing to accept less than the total amount due in order to minimize their loss.
So, in this situation, the lender accepts that $125,000 as full payment from an investor or other buyer. This amount is clearly “short” of the full $145,000 payment. And that’s where the term “short sale” comes from.
Right now, you might be asking yourself, “Why the devil would a lender consider a short sale?” Well, there are lots of reasons, and they’re often related to “hardship cases”; e.g., the homeowner has permanent injuries; financial insolvency; convictions; job layoffs; military call ups, etc. In such situations, lenders are willing to consider a short sale as part of their “loss mitigation” policy.
However, lenders don’t go into business to lose money, so they obviously think about short sales a last choice! Foreclosures can be a better choice for them. So, as an investor, should you take into account short sales as a money-making opportunity?
The answer is “Yes,” if you’re an experienced investor. If you’re a beginner, my advice is to stay away until you’ve gained enough knowledge to work successfully with lenders. If possible, find a mentor to guide you through short sale deals.
You can get some good deals in this market, but short sales are definitely not the ticket to “instant wealth” as some gurus claim. Also, these gurus usually don’t mention that short sale transactions can be very difficult to complete (compared to conventional deals). Below, I describe some of the complications you have to deal with.
The Complications of Short Sales Several factors are involved in short sale transactions, and that increases the complications you have to master in order to be successful in this market.
Factor 1: the loan mitigation policy of the lender and third-party investors. These policies (and the attitudes of the lenders) can be difficult to deal with. As an investor, you’ve to both master the particulars of the policies and, at the same time, master the “politics” of dealing with lenders in the loss mitigation department.
Second is the property’s as-is value compared with the as-repaired expenses. You have to do complete due diligence to make sure a short sale purchase will make a profit after the expense of “rehabbing” it.
The third factor concerns approval for short sale. It needs to come from the investor who’s actually the owner of the loan. This can lead to more complications as you might need to work with several people involved in the sale of the property.
The fourth factor, depending on economic conditions, is that investors can flood into the market, increasing competition.
So, how can you determine if a short sale is worth pursuing? Here are the general steps to follow in order to make that determination
The General Steps to Follow in a Short Sale Transaction The steps described below occur in a majority of short sale transactions; however, they might vary, depending on your area of the country.
Step 1 Identify potential short sale properties (e.g., contact a listing agent, check the public records, etc.).
Step 2 Check the lender’s loss mitigation policy. For example, if they deal with short sales on a fairly regular basis, they’re a good choice. If, on the other hand, they seldom or never accept short sale offers, don’t waste your time.
Step 3 Determine the number of liens recorded against the property and the total amount of money in those liens.
Step 4 Determine the borrower’s present financial condition.
Step 5 Examine the type of loan that’s in default and its current status.
Step 6 Determine both the property’s as-is market value and its as-repaired value.
Step 7 Analyze current real estate market conditions.
Specific Steps To Follow In Short Sales Once you find that a short sale is worth pursuing, then you’ll need to take additional steps.
* Contact the homeowner and determine their financial condition. * Determine the property’s condition. * If your analysis shows that both the financial and property condition are suitable, ask the homeowner to give you written authorization to contact the lender’s loan loss mitigation department. * Contact the decision-maker in the loan loss-mitigation department of the lender and provide him or her with a copy of the authorization signed by the homeowner. * Discuss the short sale and ask him or her to send the appropriate short-sale documents to the homeowner. * Teach the homeowner to compile all documentation in order to prove financial hardship. * Get repair cost estimates from at least three licensed home improvement contractors. * Assess the value of three similar neighborhood properties sold in the last six months (a comparable value study). * Return the short sale proposal to the lender’s decision-maker. It should include a signed buy agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30% less, etc. * At this point, the lender’s decision-maker reviews your proposal and orders a BPO (”broker’s price opinion”) to determine the property’s as-is and as-repaired values. The BPO is usually a realtor giving his or her opinion on the property. You’ll want to meet with this realtor and influence his or her view as much as possible. It’s perhaps the most critical aspect of getting a short sale offer accepted and closing the deal! * The decision-maker either accepts your proposal or rejects it. * If the decision-maker thinks a short sale is appropriate, he or she makes a counteroffer. * You accept or reject the counteroffer. * Assuming you accept the counteroffer, you close on the transaction within 30 days.
Additional Points All short sales are cash transactions; therefore, you’ll need to have cash on hand and verifiable proof that you’ve that money. If you don’t, the lender won’t do business with you.
In addition, keep in mind that short sales can’t be made to relatives, family members, or close friends of the homeowner. If a lender finds out after the sale that, say, the homeowner’s sister bought the property, then that lender can sue to have the sale overturned.
Key Point: Short sale transactions are not for amateurs; be fully knowledgeable, experienced, and professional before approaching the loss-mitigation departments of lenders in this market.
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