What Is A Short Sale?

A short sale is when you buy a property at a discount by getting a lien holder (typically a mortgage holder) to discount the amount that is owed by the seller/owner. This is such a POWERFUL technique because it enables you to buy a property for much less than the seller owes on his mortgage(s). Therefore, you can purchase property that is over-leveraged for pennies on the dollar!

why is this so important? Because by buying property at a steep discount, you have an array of options at your disposable for turning that deal into cash (or cashflow). When you "buy right", you can make money by fixing the house up and re-selling it. You can wholesale your deal to another investor who wants to do the rehab himself, making you some quick cash. Or, you can hold onto the property as a rental and put a tenant or lease option buyer into the property. By buying right up-front, you ensure a nice profit for yourself when you sell (and better cashflow each month if you hold the property).

So what lien holders will do short sales? Just about anyone that has recorded a lien against the property. Most often, this is a bank or lender that has filed a mortgage, but it can even be a contractor or judgment creditor. For many lien holders, it makes more sense to take accept a discounted pay-off now rather than risk having their interest wiped out at a foreclosure auction. And, even first mortgage holders will accept short sales rather than waste the time and expense that would be necessary to foreclose on the property, fix it up, list with a realtor as an REO (Real Estate Owned), and re-sell it.

Helping The Homeowner

In many situations, a short sale will be the homeowners' only viable option for avoiding foreclosure. Most homeowners understand what a terrible impact a foreclosure will have on their credit. It will typically follow them around for the next 7 years on their credit report and will make life difficult anytime they need to acquire new credit, whether for a car, a credit card, even insurance. Plus, they will most likely not receive any money for their property if they owe close to what it's worth. In addition, the bank has the option to pursue a deficiency judgment against the homeowner for the difference between what is owed on the loan and what the bank actually gets for it. Besides the financial aspects to foreclosure, a homeowner that's been foreclosed on will lose any shred of dignity they have left. Their name will be published in the paper, and they may even be forcibly removed from their property by a police officer if they remain in their home after the auction date. So, any way you look at it, a foreclosure is the all-around worst case scenario for a homeowner.

A short sale, however, gives them a way out that can save their dignity and prevent their credit from getting trashed. You will not be able to pay the homeowner any money for their house (banks will not allow that), but doing the short sale will still put them in a better financial position than they'll be in if the house is foreclosed on. And, they can move on with their life and put the situation behind them.

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