Below are some great articles touching on the basics of Buying and Selling Short sales. Remember that real estate rules are always in motion, and the game is constantly changing. For a free consultation on your situation call me direct at 503-481-0501.
Buying Short Sale
Ever since 2005, buying short sales is a hot topic in many real estate circles. Investors want to know how to make money buying a short sale. Many eager entrepreneurs tried to find ways to profit from short sales and, either in their dishonesty or ignorance, are breaking the law. Some of these real estate investors know they are crooks and don't care, while yet others will vehemently defend their right to operate in a stupid and unlawful manner.
How to Make Money Buying a Short Sale to Flip
First, realize that the HAFA short sale program prohibits resale of any property you buy as a short sale for 90 days. Even in a traditional short sale, the bank might present you with a restrictive agreement, which you will sign and agree to that prevents an immediate resale. Therefore, if you plan to flip a home, plan on holding it for a while.
Consider a Preappoved HAFA short sale.
A preapproved HAFA means the bank has already established the price for that short sale. Many banks price short sales based on the opinion of an agent they hire to produce a fast and cheap appraisal called a BPO. The banks don't ask the listing agent for an opinion of value. Because of this practice, it is not unusual for a Preapproved HAFA short sale to be listed under market value.
Look for a Short Sale With Long Days on Market
Since the idea is to buy low and sell high, you want to pay as little as possible for a short sale. Prices for short sales are all over the map in some towns. Sometimes the bank grows weary of starting the short sale process only to watch the buyer walk away. If the home has been on the market for a long time, the bank might be more willing to wheel and deal.
Target Homes in Foreclosure Near Auction
It costs money for banks to foreclose. If the bank is open to a short sale, that means it will make more money doing the short sale than doing a foreclosure. If the date for the trustee's auction or default sale is very close, banks will sometimes make last-minute deals and postpone the auction. Those last-minute deals can be very profitable for a short sale investor.
How to Make Money Buying a Short Sale for a Rental
There are a large number of companies online who have worked out all sorts of sneaky ways to break the law. Some insist that the homeowner deed the property to the company or a holding company. Then, that company negotiates with the bank. Do these companies comply with federal and state disclosures? Probably not. I don't suggest this route.
Others try to make themselves the middle man by double-escrowing the sale. They do not understand it is considered short sale mortgage fraud to conceal information from the short sale bank. Yet, they do it anyway. They arrange to buy the home from the seller, and they also demand to handle all of the negotiations with the seller's bank. That is a huge red flag for sellers. Sometimes they offer to rent the home back to the seller, but most banks require an arm's length affidavit that prevents it.
Buy a Short Sale Fixer Home
Short sales are typically sold in an "as is" condition. This means the bank will not make any repairs nor authorize the seller to make repairs. The bank rarely sends a contractor to inspect the home and instead relies on the BPO agent's report. BPO agents are not general contractors. The BPO might greatly exaggerate the amount of money it will take to fix up the home.
Submit Repair Bids With Your Short Sale Offer.
The bank will want to see what's wrong the home and how much it will cost to fix it, even though it won't allow repairs. Almost every home needs some type of repair. From this, the bank will set value. The bank will choose the lowest bid, so make sure the lowest bid is a bid from which you can make money on the short sale.
Show the Home for Rent Upon Short Sale Approval.
Since the seller owns the home and not the bank, you might get written permission to show the home for rent after the bank issues its short sale approval letter. That way a tenant could be ready to move in to the home on the day it closes. Remember, rent is paid in advance. Your first mortgage payment won't be due for at least 30 days or more.
There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale."
When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.
If you are considering buying a short sale, there could be drawbacks. For your protection, I suggest that all borrowers:
Obtain legal advice from a competent real estate lawyer
Call an accountant to discuss short sale tax ramifications
As a real estate agent, I am not licensed as a lawyer nor a CPA and cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.
Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.
Call the Lender
You may need to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department, you want the supervisor's name, the name of the individual capable of making a decision.
Submit Letter of Authorization
Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. The letter should include the following:
Loan Reference Number
Your Agent's Name & Contact Information
Preliminary Net Sheet
This is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your closing agent or lawyer should be able to prepare this for you, if you do not know how to calculate any of these fees. If the bottom line shows cash to the seller, you will probably not need a short sale.
The sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market Analysis
Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:
Active on the market
Solds from the past six months.
Purchase Agreement & Listing Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans or termite inspections.
Now, if everything goes well, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request. Credit report status is not always negotiable.