For property owners who are unable to make their mortgage payments on time, foreclosure or filing for bankruptcy may seem inevitable. But the truth is that there are alternatives. One such alternative is called the "short sale".

As a property investor looking to buy a property during the pre-foreclosure stage of foreclosure proceedings, it's worthwhile knowing how to explain the options available to a home owner, so you can help them appreciate the appeal of your purchase offer. In particular, selling them on the concept of a "short sale" is likely to benefit both you and them. And you can help "sell" them by helping them with the tasks of (a) convincing their lender to approve the short sale, and (b) assembling all the paper-work required.

A short sale is where the lender is willing to accept an amount that falls short of the total that is actually due. This may not always be acceptable to a lender, particularly if a foreclosure would make more financial sense. Also, a seller or property must qualify for a short sale based on certain criteria, which may not always be present.

For anyone planning to short sell a property, there may be certain pitfalls and it is advisable to suggest that the home owner obtain advice from a lawyer competent in property matters. It is also in their interests to consult an accountant in order to understand all the tax implications of a short sale. For example, the Internal Revenue Service considers forgiven debt to be income. Plus, following a short sale, lenders sometimes go after the borrower to recover the shortage, or "deficiency" as it is known in some states.

In order to have your offer to buy a pre-foreclosure via short sale accepted by a lender, you'll need to comply with their requirements regarding such matters as the documents to be submitted and procedures to be followed. In general, the first step is for the home owner to call the lender and discuss the offer and why it should be accepted. The next step is for the home owner to provide the lender with a number of important documents.

The first such document is an authorization letter which records the home owners approval for the the lender to talk to any party who may have an interest in the loan. Another document that must be put together and submitted is the preliminary net sheet. This is the balance sheet applying to the mortgage. The home owner may need their lawyer or closing agent to assist with this.

Combined with the above, the home owner will also need to put together a hardship letter explaining their poor financial situation and how they got into it. This letter should have an emotional appeal to it. Other documents required by a lender are likely to be proof of the home owners assets (if any) and sources of income, along with amounts. The home owner should also furnish copies of bank statements, along with written explanations for any large, unusual transactions.

Often the home owners financial situation is the outcome of a fall in property values in their area. If so, a comparative analysis of the market will help build a case for the short sale. You can provide this to the home owner in order for them to supply it to their lender (although the lender will typically conduct its own appraisal of market values).

Finally, the lender will want to see a copy of the sale and purchase agreement. If this, along with the other documents provided, are acceptable, the lender will likely approve the deal.

As you can see, a home owner must do a little work to convince their lender to approve a short sale. Therefore, if you as the purchaser can guide the home owner through this process and help them as much as you can in terms of assembling and providing all the required documents, you will probably have a better chance of securing the deal.

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