Banks aren’t in the real estate business. Their hands are full. It doesn’t benefit them to go through the legal process of a foreclosure, pay the attorneys, kick the homeowner out of the house, worry about vandals breaking in, hire a contractor to make repairs, pay the property taxes, and pay the utilities while it just sits there along with thousands of others, waiting to be sold.

This is GREAT news. Within the past few months banks have been much more willing to modify existing loans and short sell properties. Think about it… If you’re a lender would you rather…

A.) Foreclose on a property, pay all the holding fees (taxes, repairs, utilities, etc.), deal with the headache of managing and selling the property, and still lose money.
B.) Re-negotiate an existing loan, keep a homeowner and family in a house, maintain a monthly payment from the owner, and still lose money.
C.) Short sell a property, save the seller’s credit, avoid taking control of house, getting it off the bank’s books and still lose money.

B and C are the correct answers. The banks are going to lose money and they know it. But, by modifying a loan or short selling a property in foreclosure, they are eliminating the hassle and expenses associated with actually owning the property.

DISADVANTAGES (I’m starting with disadvantages because I always like to end on a positive note!)

Attempting to negotiate a short sale via the conventional method of buying and selling houses is very difficult. There are so many parties involved in the negotiation that the deal usually never works out.

Parties involved:

1.) Seller
2.) Seller’s agent
3.) Prospective buyer (there can be many prospective buyers)
4.) Prospective buyer’s agent (many of those as well)
5.) The first lender
6.) The first lender’s loss mitigator
*sometimes there can be two or even three loans

As you can see there are at least six, sometimes even up to eight or ten interested “parties” all negotiating one deal. I’m a big sports fan and I liken the conventional (when both the buyer and seller each have their own realtor/agent) short sale process to a four team sports trade. Some of you might have no idea what I’m talking about, but the point is that they rarely ever work out.

ADVANTAGES

Enter the investor. When you choose to sell your house via a short sale with an investor, the likelihood that the deal will be accepted by the lender is greatly increased. The reason for this is because there are fewer “parties” conducting the negotiations. Fewer “parties” means fewer concessions need to be made, which means more people are happy, which means deal gets approved.

Now I’m not here to say anything bad about realtors because most of them are excellent and completely professional; it is just very difficult for everyone to agree to a deal. However, when an investor is heading a short sale, rather than a realtor, there are only 3-4 parties involved (seller, investor, and lender(s)).

So how does it work? Let’s say that 30 months ago you purchased a house and got a 30 year mortgage for $250,000. After 30 months of payments you still owe approximately $225,000 but the house only has a fair market value of $200,000. Clearly you owe more than your house is even worth which mean you have no equity.

Now, an investor and a seller will link up and the investor will place an option to purchase the home. This step is when the investor proves him/herself to be a true professional. The investor is essentially doing all the dirty work for both the seller and the bank and is getting paid for it.

The investor will negotiate a purchase price with the bank usually even farther below fair market value. After a round of negotiations, the lender will agree to short sell the property to the investor for let’s say $170,000. The investor walks away with a property purchased for 85% fair market value and the bank no longer has to pay the expenses of moving the property into foreclosure and resale.

What’s in it for the seller? The seller gets to walk away free and clear, nothing out of pocket, WITHOUT A FORECLOSURE APPEARING ON THEIR CREDIT HISTORY. (A good investor always negotiates for Full Relief of Debt owed!) If you’ve never had explained how a short sale works you might be thinking that the seller got screwed. On the surface it can look that way, but let’s break it down. The seller owed $225,000 on a house worth $200,000. If sold in the retail market, the seller, who is already struggling financially, would have to come up with $25,000 at closing plus seller closing costs and commissions!

If the house is on the market for a decent amount of time (4-10 months) before a retail sale, the seller certainly cannot make the payments because he/she has already been given a notice of default and is in pre-foreclosure. If the house is foreclosed on nothing comes out of the pocket of the seller, but a foreclosure will appear on the seller’s credit history. Therefore a short sale is a great option for those who are struggling to make payments, faced with foreclosure, and just want to get out of bad situation.