What is a Short Sale?

"$hort $ale"

The new buzz word in the real estate investing world. Where everyone is going to cash in on the foreclosure market. Realtors are afraid of short sales and investors think it's the new thing. Short Sales are not new and they are only one facet of investing in pre-foreclosures. A Short Sale is when a lender agrees to accept less than the balance due on a loan.

When a property owner finds themselves unable to make their mortgage payment and their loan becomes more than 30 days late, the lender has a non-performing loan. When the non-performing loan is more than 90 days late the lender will generally initiate foreclosure proceedings which will result in a forced liquidation of the property. Traditionally, a foreclosure sale at the local county court house. Generally the lender will be the high bidder at the foreclosure auction and the property becomes "Bank Owned" or an REO (Real Estate Owned).

Lenders are in the business of lending money not the business of owning real estate and all the costs associated with owning a vacant house. Accepting a lesser amount than the balance due may be preferable to foreclosing and owning a vacant property.

A lender will not just accept any offer to avoid having an REO Property. They are looking at the numbers and if a short offer nets the lender more money than the foreclosure, they will usually do the deal. It takes a great deal of time and research to do a short sale. Knowledge of the Loan Product is paramount. The loan product determines how the lender the disposal of the property. There are properties that the banks will not short and there are properties that the banks will not foreclose on. Loan Product is FHA, VA, Fannie Mae, Freddie Mac, Conventional, PMI, and the list goes on. If you don't know the loan product, don't waste your time working a short sale.

I've got a FHA pre-foreclosure listed in the local MLS and another realtor called me to say that his client wanted to make an offer. I informed him that this was an FHA loan and that there is a minimum amount that the lender can accept. His offer was $18k below that and his comment was that sometimes the banks just want to unload these properties. The problem here was that he did not research what I gave him about a FHA pre-foreclosure and this property was not even foreclosed on yet and the bank can't "unload" it. This offer from an arrogant realtor was a gross waste of my time. You have got to understand Loan Product.

Before deciding to jump into the world of short sales and start making offers, take the time to learn your states foreclosure laws, procedures and time lines. You need to know if you live in a short time-frame state or a long time-frame state. Are you in a Deed of Trust State or a Mortgage State, Judicial or Non-Judicial. Doing your homework ahead of time can keep you from making serious mistakes that can cost thousands in lost profits.