What Is a Short Sale in Real estate? How to Approach it?
When a financially distressed homeowner owes more on his home than it’s worth and the homeowner needs to sell, the transaction in which the homeowner will sell the property is called a short sale.
The buyer of the property is a third party (not the bank), and all proceeds from the sale go to the lender.
Before the process can begin, the lender holding the mortgage must sign off on the decision to execute a short sale, also called as a “pre-foreclosure” sale.
Deficiency in Short Sell: Meaning, a person selling a home for $150,000 when there is still $175,000 remaining on the mortgage. In this example, the difference of $25,000, minus closing costs, and other costs of selling, is considered the deficiency.
Buying a short sale property can allow buyers to purchase a home at a discount, but short sales tend to be lengthy and paperwork-intensive transactions, that can take significantly longer duration, even sometimes taking up to a full year to process. However, short sales are not as detrimental to a homeowner’s credit rating as a foreclosure.
For the distressed homeowners, before resigning to a short sale, they should talk to the lender about the possibility of a revised payment plan or loan modification.
If the homeowner has PMI, it may advance funds to your lender to bring your payments up to date. Eventually, you’ll have to repay the advance.
An experienced real estate agent can make a big difference in terms of both finding and closing short-sale properties.
A short-sale property can provide an excellent opportunity to purchase a house for less money. In many cases, short-sale homes are in reasonable condition, and while the purchase price might be higher than a foreclosure, the costs of making the home marketable can be much lower, and the disadvantages to the seller less severe. However, because of the lengthy process, buyers and sellers must be willing to wait. An experienced real estate agent can help you determine a fair offer and negotiate with the bank.
While many investors purchase short-sale properties and quickly resell them for a profit, others choose to maintain ownership and use the property for income by collecting rent. In either case, each property must be carefully evaluated prior to purchase to determine if it has profit potential.
Because tax laws are complicated and can change from time to time, it is always recommended that you consult with a CPA who knows about real estate investing and related tax laws to give you comprehensive and up-to-date information. It can mean the difference between making a profit and taking a loss on an investment.