Understanding Real Estate Short Sales


photo credit: sscornelius

The so-called "short sale" in real estate is quite an oddity in comparison to traditional real estate lending. It essentially means that the bank that offered the mortgage loan will be willing to accept an amount lower than what is still owed. This is obviously something that a lender generally wouldn't be interested in doing so the short sale is an uncommon aspect of real estate sales. The fact that it's not common makes it a bit confusing for people who have never been involved in a short sale before. However, it's something that can be done fairly easily, especially with the housing market the way that it currently is, so it's worth looking into if you're in the business of buying and selling real estate property.

The short sale is essentially an agreement by the buyer of the home to pay off the outstanding home mortgage debt to the lender of the home owner. However, the amount agreed upon is lower than the actual amount of outstanding debt. For example, let's say that Home Owner A owes $100,000 on an outstanding mortgage. Buyer A agrees to purchase the home for $80,000 and the mortgage lender agrees that this satisfies the total amount of the debt despite the fact that it isn't the full amount owed. The buyer benefits because the home is cheaper than it should be, the home owner benefits because the home sells and he is relieved of the mortgage payments and the bank benefits because a significant portion of the debt is paid off.

But what would cause a mortgage lender to accept a lower-than-outstanding amount on a real estate debt? There are a number of things that would prompt the lender to be willing to do this. Some of the most common reasons include:

The mortgage is currently facing foreclosure so the bank is at risk of losing money anyway.
The property is in such bad condition that the bank is willing to accept a lower amount due to the decreased value of the home.
The bank sees the mortgage as a liability for one reason or another and wants to get rid of the property.
The neighborhood has declined in value since the time that the mortgage loan was first issued.

Some of these reasons may deter real estate buyers from considering the short sale purchase because it could reflect problems with the property. However, it is often the case that the homeowner has defaulted on the loan and the bank doesn't want to have a large percentage of loan defaults on record so the short sale will benefit both the bank and the new buyer.

Since home values have gone down in recent years and the issues people are facing with foreclosures have risen, there has been a vast increase in the number of people interested in real estate short sales. There are many properties out there with outstanding mortgages that have decreased in value so the savvy real estate investor can snap up these homes at a bargain using the short sale and can then hang on to them for resale when the market improves again.

For those people interested in purchasing a property using the short sale, the most common steps to take are the following:

Locate the property that you are interested in purchasing and make an agreement with the home owner about the deal. Have the home owner sign a "letter of authorization" which will allow the lender to discuss the possibility of a short sale with you even though you are not the home owner. This letter includes basic information such as the property address, the account number for the loan and your contact information.
Contact the lender and ask to speak to the Loss Mitigation department. Ask about the possibility of a short sale on the existing property. Not all lenders will be interested in the short sale and not all properties qualify for the short sale so it will be important to make sure that this is even a possibility before moving forward.
Put together an offer regarding the short sale. This should include the price that you are offering, the reason that the property is no longer valued at the full price and a net sheet showing the total amount that the bank will receive from the deal. Many people also include supplemental information such as a letter from the homeowner stating that bankruptcy would be the alternative to the short sale. It should also include traditional loan application information such as proof of income.

There are certainly things to watch out for with the short sale. You don't want to get a bad property that you can't turn around and sell later so the inspection and an assessment of necessary repairs are very important in this type of sale. You will also want to encourage the homeowner to discuss the short sale with a financial advisor because of the impact it can have on their credit rating and the issues that could come up later if you didn't encourage them to do so. Despite these concerns, there are financial benefits to learning the ins and outs of the short sale, particularly given the current state of the mortgage market.

Kristin Kizer
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