Short Sales Foreclosure

The definition of a short sale is the sale of real estate in which the sales price falls short of the balance owed on the property's loan. It most often occurs when the borrower cannot make the mortgage loan payments on their property and the lender decides that taking less than what is principally due is the best solution. Both the borrower and the lender must consent to a short sale.

Short Sale Process

To begin investing in short sales foreclosure, you need to know the short sale process. If you recall from our preforeclosure page, when a borrower doesn't make their mortgage payment they become in default. During the stage of preforeclosure, the opportunity for a short sale exists. The borrower doesn't have to always be in default for a lender to do a short sale, but typically lenders won't agree to one unless the borrower is obviously struggling.

Negotiating a short sale foreclosure can be a daunting task. One way to simplify the process is to have your realtor or broker find a short sale foreclosure opportunity for you.

Short sales foreclosures have both advantages and disadvantages for both the borrower and the lender.

Short Sales Foreclosure Pros and Cons for the Lender

From the lender's perspective, short sales can be a good solution. They will avoid many costs by not going into foreclosure such as attorney fees, carrying costs, damage to property, broker fees if it ends up getting sold as REO, etc. The negative is that they will take a loss on the principal balance.

Short Sales Foreclosure Pros and Cons for the Borrower

The borrower's credit will be dinged for doing a short sale. A person's credit can even be dinged as much as if they went into regular foreclosure (on average 200-300 points). However, if you have a foreclosure on your credit report you will have to wait 5-7 years before getting another mortgage. But with a short sale on your credit report, you can typically get a mortgage within 2 years.

Also, the borrower will have to prove insolvent to the IRS or they may be taxed the difference between what they owed and what the property sold for as income. Insolvent means that your debts were bigger than your assets. In general though, it would be less damaging to have a short sale on your credit report instead of a foreclosure.

How to Short Sale

To initiate a short sale, you must talk to the bank's "Loss Mitigation Department". Be patient, getting to the right person can be frustrating.

Once you are dealing with the right person, the process begins. The lender will want some information about the property. Most importantly, how much is the property worth. They will hire a broker or an appraiser to determine the value. This becomes known as Broker's Price Opinion or BPO.

This is a negotiation and you are trying to "sell" the lender on the idea that a short sale is the best solution. So provide as much negative information as you can such as an estimate of repairs from a contractor, copies of newspaper articles about crime in the area, and anything else that you think may convince them that taking a loss and getting rid of the property is smart.

The lender will also want to borrower to submit a hardship letter. This is basically a letter explaining the borrower's financial difficulties.

Lastly, the lender will want to see a contract between you and the seller. The important thing here is to show that the seller isn't walking away with any cash. The net amount to the seller must be equal to the amount of short pay to the lender.

How much should I offer?

This is the most important part of the whole short sales foreclosure process. Some people just blindly offer 30-40% less than the as-is value of the property. You can do this- but your offers will probably get rejected.

So how much do I offer? Let me explain something to you. Lender's all have an Approval Percentage Threshold. This number varies from lender to lender and changes frequently. An approval percentage threshold is simply the percentage of the BPO that the lender will accept a short sale.

For example, the BPO for a property is $150,000 and the lender's approval percentage is 85%. That means that the lender would accept $127,500.

You may be thinking 15% off of the value isn't that great of a deal. Well it isn't, but often times the BPO is too low. What if the actual value of the house is $175,000. Then you are getting a good deal!

You must remember though that the bank will stay within it's approval percentage threshold. So offering 40% less will do you no good.

You probably won't know what the number is, but if you offer something close, you likely will get a counter. Getting a counter can be difficult. Basically, you will have to call the bank several times.

In conclusion, a short sale isn't always a great deal, but often times it will be. Just be patient, yet persistent. Dealing with the banks isn't easy, but can be done. Remember, hiring an agent who deals with short sales or already has one prepared will save you some time.

Return from Short Sales Foreclosure to Straight Up Real Estate Investing