Short-Sale Property Investing 101

One of the best ways to get a fantastic deal on distressed real estate is to pursue a purchase strategy known as a ‘Short-Sale’.  Not as widely known or tried as standard ‘Foreclosure’ or ‘REO’ purchases, attempting this transaction type can require more work, yet the payoff can be well worth the trouble.  In this article I will describe what a Short-Sale is, outline how it differs from other distressed properties and discuss how best to take advantage of these opportunities.

What is a Short-Sale Property?

A Short-Sale is a purchase transaction in which a buyer is able to purchase a property for less than the outstanding mortgage on the property.  In these cases the property’s value is often not enough to satisfy the amount still remaining owed to the bank or lender otherwise the owners would typically simply sell the property, pay off the mortgage and keep the difference.  A Short-Sale transaction is one where a 3rd party purchaser is able to negotiate with the lender sale terms that prevent foreclosure on the original owner and note holder, but that are less than the amount still owed on the mortgage.

How is a Short Sale different from Foreclosures and REO’s.

Short-Sale purchases differ from Foreclosure and REO purchases for two primary reasons.  First of all the purchase occurs before the property actually is foreclosed upon and typically occurs during the pre-foreclosure process.  Secondly, a Short-Sale implies that amount paid for the property is ‘short’ the full amount due on the property. 

Elements of a Short-Sale Transaction

There is a specific set of elements that take place during a Short-Sale purchase starting with the Short-Sale buyer identifying an appropriate property, conducting appropriate research and approaching the current owner of the property to discuss the idea of the 3rd party approaching the lender. 

A Short-Sale buyer must always have the permission of the current owner.  This is because legally if the current owner does not agree to help you do a Short-Sale they can stay in the property and only be forced to leave after the foreclosure already occurs at which time the property will be put up for auction.  The idea is for the Short-Sale party to convince the property owner that is behind in his payments that it is to his benefit to avoid foreclosure and help them do a deal directly with the lender, hence saving their credit and the additional headache of having a foreclosure on their record.

Once a Short-Sale party has the permission of the homeowner in writing, they may then approach the loss mitigation division of the lender on the property.  This is the first chance to develop a friendly relationship with the lender and to inquire what kind of terms the lender might be looking for in order to agree to a Short-Sale transaction on the property.

The next step would be to take into consideration what you’ve learned from the lender and then go about crafting a ‘hardship letter’.  This letter outlines the actual financial details of why the current owner can’t continue to make payments on the property and gives a compelling case convincing the lender that if that a foreclosure or bankruptcy is absolutely inevitable.  Only if this case is made will the lender likely consider the option of a Short-Sale so this is a crucial step.

For the next steps involved in securing a Short-Sale property including step-by-step secrets to ensure success please visit www.PropertyWorkouts.com