Real Estate Investment
What is a Short Sale or
Pre-foreclosure?
When a
real estate property owner fails to make mortgage payments for a number of
months they are said to be in default. The foreclosure process can usually
take a number of months. The first step of the foreclosure process that
the lender will take is to file the notice of default, which is a public
document that is recorded. The property owner will then arrange a contract
so as to sell the home conditioned, upon the lender accepting a lesser
amount than what is originally owed on the mortgage. It is to be noted
however that there are no similarities between selling a stock short and a
real estate short sale.
What is a
Short Sale?
Most investors always have several
questions when they find some one who specializes in real estate short
sales. Here are the answers to some of the most common questions by real
estate investors which would hopefully, give a better understanding of a
short sales and how to go about doing one successfully.
Reasons why
banks indulge in short sales
Here are the most common reasons why banks
will agree to a short sale:
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If the property is in poor condition.
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If there are new homes in the area are being chosen over existing
homes.
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If the mortgage is in arrears or foreclosure.
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If the area or neighborhood has depreciated in value.
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If the homeowner has hardships and cannot afford the payments.
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If the bank?s shareholders are concerned when there are too many
defaulting loans on the books.
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Certain banks are required to prove a loss each month
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Certain banks are required to have an amount equal to or up to six times
the retail value of each REO in hand
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If there is an REO which is a liability, not asset and too many
liabilities will cause any business to go under if not dealt with
effectively.
Can a good property be available as
part of a short sale?
Yes! As mentioned above, banks short sale
for many reasons other than the poor condition of the property.
Steps to a successful short sale
1. Locate a
property owner in distress.
2. Arrange for
a deal together with the homeowner.
3. Have the
homeowner sign the authorization to release form.
4. Fill out a
sales contract for the amount you wish to offer the bank and have the
homeowner counter-sign it.
5. Liaison with
the Loss Mitigation department at the bank.
6. Send them
your offer along with the following details:
? A
cover letter explaining why you are not able to offer the full
price.
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The duly filled sales contract.
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Justifying components of the area.
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Pictures of the area, if you have them.
? A
net sheet or closing statement. This is a sheet that shows the bank
exactly how much they will net after closing costs, taxes, etc. are
paid.
? A
hardship letter from the homeowner that mentions the fact that he is
headed towards bankruptcy.
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Estimated list of repairs as well as the costs involved, using retail
repair prices that the normal homeowner would pay for these items.
Related aspects of a homeowners
credit
When a successful short sale is negotiated,
it is important to keep in mind that the agreed upon price is a payment in
full. However, the homeowners may still owe the difference between the
mortgage balance and the discounted amount through what is known as a
?deficiency judgment?.
If granted, this judgment will affect the
homeowners and their credit report as would any other judgment. It is
therefore necessary to get the bank to agree to accept ?payment in full
without pursuit of any deficiency judgment?.
In addition to this, is important to
explain to the homeowner that the discounted amount or the difference
between the mortgage balance and the short sale, may be declared as income
on their income tax return by means of a ?1099? form.
The homeowners should consult with their
accountant for advice. Since the homeowners have been in such pressure and
probably have not made much income, a 1099 form may not affect them
adversely.
This is sure to shed some light on short
sales since nine out of ten deals have no equity. In order to be
successful in this property investments business, it is imperative that
you be a short sale expert.
