An Introduction to Short Sales

A short sale is a transaction between a lender, a homeowner and a third-party buyer. In this transaction, the lender agrees to take less money for the home than is owed on the home in order to avoid having to repossess the home due through foreclosure. The transaction benefits the homeowner because they are able to exit the home – and their mortgage – without the stain of foreclosure on their credit. In fact, some short sales “fall off” a homeowner’s credit report in three years or less. The transaction benefits the lender because they do not have to deal with foreclosing on, repairing, marketing and ultimately selling the home. Lenders do not want property; they want money.

So if a real estate investor or other buyer can show a lender that the process of getting rid of the home after foreclosure will be more trouble than agreeing to a short sale, then the lender will likely agree to the short sale. Finally, short sales benefit the third-party buyer because they represent an opportunity to buy a property for less than it is actually worth. So far, short sales are probably sounding pretty appealing. And they are for good reason. They are a great way to “buy low and sell high,” which is the real estate investor’s mantra. However, as you may have noticed from media coverage or from speaking with other real estate investors who do short sales, these transactions are not quite as simple in “real life” as they appear on paper. Negotiating with a lender on a short sale can take months, and real estate investors must be prepared to prove to a lender that there is no way for the lender to get their money back out of a property in a timely fashion in order to convince the lender to do a short sale. This requires research, patience and hard work for which many people simply do not have the time, talent or inclination.

Another important factor that you must consider if you want to get involved in short sales is the extremely close government and legal scrutiny that is currently involved in the process. Thanks to government involvement in short sales via the Home Affordable Foreclosure Alternative (HAFA) program, which the majority of experts agree was an unmitigated failure, and some unscrupulous real estate agents who were involved in some legitimately fraudulent activity in short sales in the early years of the bust, real estate investors are once again considered to be the “bad guys” in the short sale scenario. Since every state has different regulations for how short sales can be managed, by whom they can be negotiated and how long a property must be held (“seasoned”) before it can be resold after a short sale, be sure that you have sound, educated legal advice on each deal that you do before you ever get to the point of negotiating with a lender or signing contracts.

Short sales can be immensely profitable, and most real estate investors believe that they are well worth the time and effort because of the large profits that can be reaped. However, be sure that you understand the process and have a good legal advisor on board before you get started. That little bit of preparation will be well worth it once you really get involved in the short sale life.