In some real estate markets, it is common for the value of a property to be less than the outstanding mortgage balance, usually because of a negative change in the local economy or an over-leveraged borrower. In these situations there are many reasons a lender will consider a short sale on a property once a borrower has begun to default on payments. This can provide an investor and excellent opportunity if they are in the right market at the right time.
A sale of the property for less than the amount owed on the current mortgage will have to be approved by the bank. This is called a "Short Sale". Lenders will consider this type of offer if they can see that the property’s value is below the amount of the mortgage balance. It is your job to help them see that this is the case.
Short Sale ProcessIn order to have a successful short sale all the players must be involved, as you the investor orchestrate the entire operation. The short sale process will require a lot of extra time, effort, and legal pull (your attorney) to make it happen. Here is the list of the players:
- You (the buyer)
- The Seller/Debtor of the property
- The Lender(s)
- The Insurer (PMI)
Everyone has to agree that the property is over financed. Everyone is going to have to see how each will win by losing less money if you are involved. Get all the above players willing to listen, and condense the transaction in writing that explains what you expect to happen. This is usually done with a Standard Form Purchase & Sales Agreement (P&S) and other documents.
Your package should include the following:
- A Cover Letter
This letter should explain in detail the complete transaction. Each item in this package should be listed and thoroughly explained in detail.
- Financial Statements of the Seller(s)
Accountants or bankruptcy attorneys can provide complete no-nonsense statements. I might suggest a copy of a bankruptcy statement (for effect).
- Net Settlement Sheet
This is a complete list of your proposed price; all costs of the transaction, including the net amounts the lender(s) and insurance company will receive or pay respectively.
- B.P.O
Several Brokers’ Price Opinions and a synopsis of each on a cover sheet.
- Renovation/Repair List (with prices)
A complete detailed list of all repairs, renovations, and the like required to bring the property up to marketable condition for sale as compared to similar properties in the area.
Written estimates for as many if not all the repairs noted in the above detailed list.
- Photographs of the Subject Property
Get detailed photos of both the interior and exterior; include all problem areas. You would be wise to make this a large section of the report. Outside photos are best taken on an overcast day.
- Purchase and Sale Agreement
Copy of the P&S signed by both the seller(s) and you. Include all addenda and note that this P&S requires‘third party and fourth party’ approvals (the lender and PMI Insurance Company)
- Your Deposit Check (or a copy)
Bundle this in nice neat packages for the bank, the PMI insurance company, your attorney and you.
I have been able to get most of my short sales approved when I use a full package like the one above. It is best to start this process as soon as possible; I suggest right when the borrower(s) begin to default. If there are only three weeks to the auction, don’t bother as the bank can take several months to approve the sale.
Even with the time consuming nature of the process a short sale can provide an investor the "room" necessary for a deal to make sense, and brokers and Realtors can also experience more sales utilizing this skill.
Alan is a millionaire real estate investor with over 25 years of experience. He is an author, speaker and educator specializing in creative and traditional real estate investing.
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