If real estate investing is new to you then you might
wonder what the term "short sale" means. You might also be
thinking, in a market that exists today, what short sales
could offer you in the way of opportunities.
The best way to describe short sales is with an
illustration:
The loan on a home is greater than the price the owner can
sell it for. Let's assume that the unpaid balance of the
loan is $140,000 but the house won't sell for more than
$120,000. Obviously this is not an ideal scenario for the
owner or for the lender. It means the lender is at risk of
losing money and that's not something they want! In order
to have minimal losses, the lenders agree to accept less
than the total amount due. In this illustration, the lender
considers the $120,000 as payment in full. Now it's clear
that this amount is "short" of the full $140,000 payment.
You can now see where they derived the term "short sale".
Why in the world would a lender consider a short sale?
Well, there are many reasons often related to "hardship
cases"; e.g., the homeowner has permanent injuries;
financial insolvency; convictions; job layoffs, etc. In
such cases, 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 consider
short sales a last resort. Foreclosure can be a better
option for them.
So, should you consider short sales as a money-making
opportunity?
Well, good deals can be found in short sales, but it's a
much more complicated process than conventional real estate
sales. It's made complicated by the fact that there are so
many factors involved: - The loan mitigation policies of
the lender and third-party investors - The borrower's
financial condition - The property's as-is value an
as-repaired expenses - Approval for short sale needs to
come from the investor who is actually the owner of the
loan.
So, how do you know if a short sale is worth pursuing? Here
are the steps to follow in order to make that determination:
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: Analyze 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.
Once you've followed all these steps and determined that a
short sale is worth pursuing, then you'll need to take
further steps. First, keep in mind that all short sales are
cash transactions. This means you'll need to have cash on
hand and verifiable proof that you have that money.
Otherwise, the lender will not do business with you. Follow
these steps:
- Contact the homeowner who's in foreclosure and determine
the homeowner's financial condition.
- Determine the property's condition.
- If you conclude 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.
- Instruct 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 purchase
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
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.
One last point: Short sales can't be made to relatives,
family members, or close friends of the homeowner. If a
lender later finds out after the sale that, say, the
homeowner's sister bought the property, then that lender
can sue to have the sale overturned.
My advice: Approach short sales with caution and be
prepared to put in a whole lot of work in order to make
them succeed.
Jack Sternberg
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Jack Sternberg is a nationally recognized expert on real
estate investment and the creator of the renowned "Buyers
First Program" who's been in the business for more than 30
years. Sternberg's deals have totaled over $750 million and
he's been to the closing table more than 1,500 times. For
more, visit http://www.askjacksternberg.com
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