Short Sales - Real Estate

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There are some "gurus" that say they will teach you how to make a fortune in real estate by using the so-called "short sale" method. And they tell you short sales are an easy way to make a lot of money. But is that just a lot of hype, or is it factual? Just what is the truth?

To answer this, one must look at all the facts.

Lenders may "discount" the balance due on a homeowner's mortgage if he is in financial trouble, if they so choose. This is called "selling short" (of the amount owed), or more commonly, a "short sale". The purpose, of course, is so the homeowner can find a buyer quickly, before foreclosure becomes necessary. Foreclosure is an expensive and time-consuming process that some lenders may want to avoid, especially if they are flooded with foreclosures and the market is slow. But in any normal market, lenders would rather foreclose, then sell at nearly market value. Why take a discount if they can get full value? So, in most instances, a short sale is simply not going to happen.

Here are some questions the lender will require answers to before even considering to allow a short sale:

• Does the homeowner deserve to be considered? Has he been honest and forthcoming, and is he really in dire financial straits?
• Will a short sale in this instance be in the lender's best interest, and why?
• Are there circumstances that could cause the lender to lose money if they foreclose (such as the property being a useless "white elephant", or in bad repair)?

The law allows a lender to hold only a certain dollar value in real estate; that value is based on the total of the bank's assets. In a time when foreclosures abound, a lender may already be holding their limit, and therefore will likely entertain a well-written prospectus for a short sale. Otherwise - probably not.

So, short sales can, under certain conditions, be completed. So now we must look at the other side of this.

A short sale will usually put the seller - already in financial trouble - in deeper trouble. In most cases, the IRS code states that any discounted amount must be treated as income by the seller. For example, if the seller's mortgage gets discounted by $30,000, the seller will now owe the IRS the full tax on that $30,000, even though he has not received a dime! In most cases, this further debt will force the seller into insolvency from which he may never recover.

Also, in many instances, the lender may still opt to go after the seller for the remainder of the mortgage (the discounted part), called a deficiency. So, the seller no longer has his home, and still owes a large sum to the bank on a property he no longer may enjoy, and may incur substantial tax debt.

The paperwork involved is much more complex than in an ordinary transaction. The lender will want documentation that includes a letter of authorization (lender's will not provide personal info about the seller or his mortgage without it); a preliminary net sheet (estimated closing statement that includes the proposed sale price, costs of the sale, unpaid loan balances, outstanding payments and late fees, and real estate commissions, if any); a hardship letter (statement of facts that show it is impossible for the homeowner to redeem himself and pay his debt, through no fault of his own); proof of income and assets (of both the homeowner and the investor/buyer); copies of bank statements (of both seller and buyer); a comparative market analysis showing the actual value of the property; and the purchase agreement from the buyer.

You may want to note that any property that has a second mortgage will not qualify for a short sale. This is because it is virtually impossible to get a second lender to remove its lien, thereby taking the risk of losing its investment.

So, now you know the truth about short sales.

Our own program, "The Simple Man's Guide to Real Estate", includes details on short sales and on every legitimate method of investing in real estate, and if you use the strategies in our program, not only will you be acting honorably, but you will not cause harm to anyone while you profit immensely, and earn yourself a solid reputation as a good person to do business with. You may even find that you can live well without having to resort to Short Sales.

Why not check out our low-cost program today. Even if you choose not to order, you will find an incredible amount of free information in our site, including free eBooks on restoring credit, ridding yourself of debt, reducing taxes, saving money and so much more. Give it a look...