What is a real estate short sale?
You may have heard a lot recently about the so-called “real estate short sale.” You may have also wondered, “what is a short sale?” Certainly, with the rise in mortgage delinquencies and foreclosures, there have been many more short sale investment opportunities. A short sale is sometimes called a pre-foreclosure sale, and that describes one aspect of it. It is a home sale that takes place before the foreclosure is complete and therefore prevents the property from going into full foreclosure.
The reason it’s called a “short sale” is because the money paid for the house is less than the amount owed on the mortgage. You may be wondering why any lender would agree to such a deal. After all, they have a legal right to get the full amount outstanding on the mortgage. The way they would normally do this is to foreclose on the house and then sell it for more than the debt. However, normalcy has taken a backseat recently, with falling house prices, and many homes are not worth the amount owed on the mortgage.
As a result, the short sale may be the practical answer for the lender to minimize their losses. It has been estimated that each home that goes into foreclosure costs the lender over $50,000, with legal fees, paperwork, and resale, etc. If, on the other hand, the lender can sell the house for a little less than what is owed, you may find that proposition attractive. It also gets you money more quickly than foreclosure and then trying to sell the property. In case you were thinking that this is a good way to pay less for your home than you owe on a mortgage, then you should know that a real estate short sale can only be made to an unrelated third party, and not to you. Uncle Charlie, who could then sell it to him and reduce his debt.
The advantage for the current homeowner is that they can avoid foreclosure and therefore end up with less of a blemish on their credit history. From the point of view of those looking to invest in short sales, it represents a way to earn a significant income for every real dollar invested.
until next time,
David Oswald
