Be prepared for this possibility. If the short-sale transaction goes through, consult with the Internal Revenue Service IRS to see if you will have to pay taxes on the shortfall.
Also, be aware that a short sale can still affect your credit score in the sense that the months of mortgage payments you missed prior to the short sale can show up as delinquent payments on your credit report. Your bank may be more likely to be generous in this regard if you brought up your hardship before you were significantly behind. For credit purposes, while this is somewhat damaging, it is certainly less damaging than a foreclosure.
Short sales can also provide excellent opportunities for buyers to get into houses at a reduced price. Here are a couple of tips to help you make smart decisions when considering the purchase of a short-sale property. Most short-sale properties are listed by real estate agents and on real estate websites.
Some listings may not be advertised as short sales, so you might have to look for clues within the listing, such as being subject to bank approval or giving the bank time to respond.
An experienced real estate agent can make a big difference in terms of both finding and closing short-sale properties. Holders of this certification have received specialized training in short sales and foreclosures, qualifying sellers for short sales, negotiating with lenders, and protecting buyers. Realize in advance that short sales are complicated, time-consuming transactions.
It can take weeks or months for a lender to approve a short sale and many buyers who submit an offer end up canceling because the short-sale process takes too long.
Rules for short-sale transactions vary from state to state, but the steps normally include:. If you are buying a house in a short sale with the intention of flipping it, the key to a profitable transaction is a good purchase price. In real estate investing , it is said that the money is made in the buy. This means that a good purchase price is often the key to a successful deal. If you can get a property for a good price, you increase the odds of coming out ahead when it comes time to sell.
You should be able to buy the property, put it in great condition, and sell it at a price where you can still make a profit. Investors need to be able to turn around and sell the house quickly—typically at below-market—and a good purchase price makes this possible.
The purchase price is only one important number, however. Costs to consider include material, labor, permits, inspection fees, trash removal, storage costs, and dumpster rentals. A good inspection before making the purchase can alert you to any large expenses, such as a cracked foundation, faulty wiring, or extensive termite damage.
Investors look at this number to determine whether a property has profit potential. These are homes that have recently sold in the area typically up to a mile away from the subject property that have similar features in terms of square footage, such as the number of bedrooms and bathrooms. Carrying costs are your expenses for holding onto the property.
The longer you own the property, the more you will spend on carrying costs, which include:. In order for an investment to be profitable, the sum of your costs the purchase price, repair and renovation costs, and carrying costs must be lower than the ARV. If your costs are close to or higher than the ARV, it will be difficult or impossible to make a profit.
You can determine the potential profit by subtracting the purchase price, repair and renovation costs, and carrying costs from the ARV:. Under these guidelines, total investment purchase price, repair and renovation costs, and carrying costs should not exceed:.
The various investment levels are used to reduce risk in changing market conditions. You can risk more in a rising market because you are more likely to get your ARV or better when you sell. In a falling market, you are less likely to get your ARV, so your investment should be smaller.
In real estate, a short sale takes place when an owner sells their house below its mortgage value. This typically happens when the owner is under financial distress and is behind on mortgage payments. The owner is obligated to sell their home to a third party, while the proceeds of the sale go to the lender. The lender must approve the short sale before it happens. The process of a short sale can often take as long as a year due to the scale of paperwork involved.
In a short sale, the process is initiated by the homeowner. The owner will illustrate to the lender the extent of their financial distress through documents that may show a recent loss of employment, divorce decree, or bank statements. After the lender agrees to move forward, the homeowner is responsible for finding a buyer.
In a foreclosure, the lender initiates the process, essentially seizing the home after the owner has failed to make payments. The foreclosure process is generally faster than a short sale, as the lender seeks to liquidate the assets as quickly as possible. In many cases, buying a short-sale property can be advantageous for prospective buyers. However, it is important to be aware of some of the drawbacks involved.
Short sales can take a long time, with lenders sometimes taking months to approve the transaction. After the seller's approval, it may also take many weeks for the bank to approve the price. It may also want to review the preliminary title report or request additional verification regarding a seller's financial hardship. Most banks have very specific requirements for short-sale offers. Not the speediest of operators in normal circumstances, a lender can create serious logjams when it comes to approving short sales.
It's not uncommon for a short sale to take months to complete. If fatigue sets in, the buyer might walk, even if it means leaving earnest money on the table. The short-sale process is difficult enough to navigate when only one lender is involved. If the primary lender also has to negotiate the terms of the short sale with secondary lien holders, the process becomes even more perilous. Any lien holder who's not on board with the terms of the deal could throw a monkey wrench into the process, one that could set the entire process back months.
The second lender may request more information before approval. And even when all the requested information has been provided, a deal is still never a sure thing. If the debt is not recouped, the lender will have the home appraised to determine its value and schedule a foreclosure auction. These auctions are advertised in local newspapers and are typically held at either the property itself or a courthouse.
The buyer also assumes all liens. This puts the buyer at much greater risk of paying more than the initial price in renovations and repairs. If the home is not sold at auction, it becomes a bank-owned or real estate owned REO property. Remember, the lender is under no obligation to do so. Here are a few factors to consider before requesting a short sale. The nature of your current financial issues will likely make a difference to your lender when you request a short sale.
If, on the other hand, the source of your financial troubles is something that has been around for as long as your mortgage and it was not disclosed during your loan application, then the lending institution will be much less likely to agree to a short sale.
In fact, they may even opt for foreclosure. The lender will be less likely to consider a short sale necessary if you are still able to make some of your payments.
Alternatively, they may simply decide that a foreclosure is their best chance at recouping their losses. A customer representative at your bank is not likely to have the authority to make any decisions on your behalf. We can walk you through your options and find the best one given your situation. If you make a mistake in the process, it could cost you substantially more than normal. Make sure that your asking price is high enough to help stabilize your finances and keep you from further financial problems.
In order to do that, you need your short sale proposal. This proof could be in the form of medical bills, a notice of job termination, pay stubs or anything else official that can prove your current situation.
Just state the facts. After you've shared documentation around income and assets, see your options. Instead of searching through all the listings available in your desired area, focus on preforeclosure property listings online. You can also search through public records by getting in touch with the local county court. Identifying and navigating a short sale can be tricky, but an experienced real estate agent can help you.
They can assist with and explain all aspects of the home buying process, including locating short sales. Before you make an offer , you want to gain all the information you can about the property. Real estate agents are an excellent resource for determining home value because they have access to the Multiple Listing Service MLS , which provides information on the prices of homes currently on the market and recently sold.
Before you purchase a short sale, you must make sure that you know of every person or entity that has a claim to the property these are called lienholders. So, you should also double-check that there are no other liens on the home. You can ask the seller, their agent or lender for this information. However, to be safe, you should also ask a title company to do a title search on the property. When making an offer on the property, you must use your knowledge of local home values to consider what the lender will think of your offer.
You might be looking at the short sale as a way to get a deal on the home, but keep in mind that the lender is still trying to recoup as much of the remaining mortgage balance as possible — and likely also has to meet investor guidelines to accept the offer. Your offer should be close to the market value of the home if you want it to be accepted.
If the seller asks you to pay money under the table for the opportunity to apply for a short sale, refuse and report it. While the seller is required to disclose any known defects, sometimes this type of information falls through the cracks. If repairs are needed, research the cost or get estimates, so you can find out if the home will make financial sense for you in the long run.
Even after the lender has accepted the short sale, you need to ensure that the lender and any other lienholders are willing to release the collateral. The more lienholders there are, the longer this process can take. Short sales can be beneficial for all parties involved.
They provide greater investment opportunities for buyers, and minimize the financial repercussions that both lenders and sellers would face if the properties went into foreclosure.
Despite the benefits involved, there are still quite a few drawbacks that come with short sales. The process is complex and drawn out, which can increase the riskiness of the transaction and negatively impact buyers, sellers and lenders financially. Provide as much cash as possible: After having lost money on a risky investment, lenders are looking for a sure thing. If you can pay in cash, lenders will be jumping at your offer.
If not, the larger your d own payment , the safer and more enticing your offer will appear. Enlist the help of a real estate professional: Real estate agents are indispensable resources when it comes to short sales. An agent who is knowledgeable about the process will be able to research the property, advise you on its value, negotiate a better deal and ensure that your interests are protected.
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