You may have heard the term “short sale” and wondered what it referred to – and what kind of opportunities these types of transactions offer in the real estate market. Let’s define a short sale first.
A short sale can occur when a home owner’s debt on a property is greater than the amount for which the property can be sold. The result – lenders are sometimes willing to accept less than the total amount due on the house if the economic situation dictates such an action.
Here’s where the term “short sale” came from: Assume a homeowner has an unpaid loan balance of $200,000, but the property will only sell for $150,000. The lender accepts that $150,000 as full payment. This is “short” of the full $200,000 amount.
Now, naturally, no lenders in their right minds want to accept a short sale. After all, they’re not in business to lose money! Well, often, such sales can relate to hardships suffered by borrowers. These can include:
- Critical illnesses which eat up financial resources.
- Military personnel who are called up to active duty for extended periods of time and lack the income to continue mortgage payments.
- Disabling and permanent injuries
- Financial insolvency
- Lack of employment due to poor economic conditions, etc.
To put it mildly, lenders aren’t always crazy about short sales because, as stated above, they’re not in business to lose money. In fact, in some situations, it may actually make more financial sense for them to institute foreclosure procedures.
However, short sales can be very profitable for real estate investors under the right circumstances. But, in order to take advantage of short sales, you must be very well versed in the process because they’re a much more complicated process than usual real estate transactions. The complications come from the following sources:
- Loan mitigation policies (of the lender and third-party investors)
- Financial condition of the same
- The borrower’s financial condition
- The property’s “as-is” value
- Cost to repair the property in order to put it into saleable condition and market it, etc.
- Approval for short sale must come from the investor who actually owns the loan.
- Red tape (if the lender is a government-sponsored institution like Fannie Mae or Freddie Mac)
I will cover how to determine if a short sale is a good deal or not, as well as how to pursue one, in a future article.