There’s a lot of conversation, and even controversy over short sales. But you may still be wondering what a short sale is. Here is some information that may better help you understand this potentially profitable real estate investment option.
A short sale in the world of REI is a sale where the amount the seller receives from the sale doesn’t cover the liens against the property. In essence, the sale is short the money needed to pay the liens in full thereby causing a deficiency in the amount owed the creditors who hold the liens against the property.
Some short sales release the seller from his or her obligation to repay the deficiency caused by the short sale, but not all. Some sellers are still responsible for the full amount of the lien(s) even if the property sale doesn’t bring in enough money to cover the liens. This obligation is determined by the agreements made with lien holders during the short sale negotiation process.
Although a seller’s credit is adversely affected by a short sale, it’s often less so than with a foreclosure. That is often what leads a seller to seek a short sale investor in lieu of a foreclosure. A short sale lessens the damage that would be caused by foreclosure and can reduce or eliminate some of the associated costs and fees to both the seller and the mortgage holder.
With a short sale, all lien holders must agree in advance to allow the sale for a price less than the lien amounts. Before a lien holder (or creditor) will consider a short sale, the seller (or borrower) must prove they are in a financial hardship that prevents them paying the deficiencies that will result from the short sale. In essence, the lien holder is agreeing to accept less than they are owed in order to recoup at least some of their losses.
Short sale approval is done on a case-by-case basis, though many large lenders have special departments to evaluate a seller’s eligibility to be approved for a short sale. Most creditors have criteria in place that looks at the terms of sale as well as the borrower’s individual financial situation. The creditor will also get a property evaluation or appraisal to look at the property’s market value before making a decision.
Because of the vast number of parties who may be involved, the processes that take place, and the specific parameters that must be met, a short sale is a complex animal. But one that, if understood, can make a tremendous profit for REI professionals who know the ropes and seek out this form of real estate for investment purposes.
