Short Sales: The Next Wave For Investors

A short sale is the sale of a property for less than what was owed. This is very common right now and with the increasing foreclosure rate it will be so for some time.

With housing prices pulling back there are many people who will be in hard times over the next few years as their ARM (adjustable rate mortgage) turns from it’s short term fixed rate to an adjustable rate. I get calls frequently from borrowers in shock at the difference in the payments and that the increases continue monthly, quarterly, bi-annually, or annually depending on the type of ARM. This has already been showing up in the market and is on the increase. When they get the notice that payments are going up their first reaction is refinance. However, homeowners who financed 90 - 100% of their value on their last loan will be in for a dissapointment when the pullback in values takes them to a negative equity position. If the household finances were tight (which is the majority of Americans) they could be in for hard times as the payments rise…and ultimately could lose the house if they couldn’t afford it anymore.

This creates the opportunity for investors, and owner occupied purchases. Believe it or not, the bank does not want the property back. There are many costs they incur in the holding and transfer of the property. As a result, in many cases they are willing to allow the current homeowner to sell the property for less than they owe to facilitate a liquidation rather than a foreclosure. Rather than take a loss, the lender issues a 1099 to the former homeowner who take it as income. Again, this is better than a foreclosure.

The orginal homeowner must contact the lender and request the short sale. They will not give this info to the prospective buyer. The lender then approves the property to be sold at the reduced amount to liquidate the loan.

Tomorrow we discuss a mortgage “Good Faith Estimate”.

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