"Short Sale" Real Estate Investing Basics - What You Need to Know

Short sales can be an alternative to foreclosure and bankruptcy when a homeowner cannot afford his or her mortgage payments.

In today's economy, where many homeowners opt to carry large mortgages, the short sale is rapidly becoming more popular. A short sale situation that does not usually make banks especially happy but it can also be a way for homeowners, homebuyers, and, yes, even lenders to basically win in difficult situations by managing risk, and mitigating bankruptcy (for the homeowner) and the complete loss of a loan (the bank).

A short sale essentially occurs when a lender is willing to accept less than the total amount of the remaining loan balance owed on property from a real estate investor who has offered to buy the property in its pre-foreclosure state.

This can also be called a 'discounted payoff'.

Not all lenders are willing to go this route, but in some cases a short sale is simply the best solution for a lender that cannot recoup the majority of their costs, rather than facing additional fees in legal costs, uncertain timelines to resell the property, and other expenses.

Investors need to the short sale for a few reasons:

• First, any investor with large mortgages needs to be aware of all the ways of bailing out in case a property proves to be a true problem. Even in cases where a mortgaged property is doing well initially, financial problems may arise and it is useful for investors to know options besides just foreclosure and bankruptcy.
• Secondly, in cases where an investor becomes a lender as well as a property owner, it is important to remember that the short sale is a possibility.
• Thirdly and more optimistically, investors can get involved in buying from property owners who face this dilemma. The Short sale can be another way for investors to purchase property for less than its actual price.

There are many reasons why a short sale is considered, but in most cases, the catalyst is some financial disaster that's struck the homeowner (eg. Death of a spouse, divorce, or an estate inheritance are just three of the numerous reasons).

Let's look at an example. Let's say that John Doe buys a duplex home that is worth $200,000. He puts $20,000 down and gets a $180,000 mortgage. He gets a secondary mortgage on the property for $20,000 in order to upgrade it for a rental.

At first, things go well. However, John then runs into some problems. His tenants badly damage the home and leave without paying the last month's rent. At the same time, he loses his job and can no longer make mortgage payments.

He now has a dilemma - the home is now worth less than $200,000 because of the damage, but John needs to sell it for around that price just to break even with the lender. Putting the house up for sale yields no takers and John is at risk of losing his credit rating, and even having to declare bankruptcy.

In this sort of situation, an angel investor offering to solve John's situation via the "short sale" method might be a solution.

John would get rid of the property - and the mortgage payments he can no longer afford. The lender would be able to get back some of the money owed, and the buyer wouldn't overpay on the home. In order to make the short sale work, John will have to verify the value of the property and determine the cost of selling the home.

He will have to tally up his loans and then contact his lender to start the short sale process. Depending on his lender, he may get some assistance in his predicament or he may be told that his debt is his own problem.

In that eventuality, John may have to contact an investor in order to get help saving his credit rating. Given the increase in foreclosures, more homeowners today are facing this scenario, and banks are likely to be more lenient. When this strategy is executed effectively, you can buy yourself into a home literally creating equitable profit from thin air!

Brad Wozny
Founder, www.INSTANTRealEstateSolutions.com™
Creator, 8 Figure Empire™

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