by : Mark Walters

Short Sale Basics for Real Estate Investors

If your real estate investment activities involve pre-foreclosures, then you need to understand the short sale. Let's take a look at the short sale and review what's involved in putting one together.

A short sale occurs when a mortgage holder agrees to accept less than the amount due on the loan. Why would a lender consider a short sale? In almost all cases, a short sale allows the lender to get the property back more quickly at a lower cost. The foreclosure process includes many fees and possible delays. A short sale helps the lender cut his losses.

Short sale negotiations can be difficult to conduct. Just finding the right person to talk to can be a grueling process. Every lender will probably have a different department that deals with short sales, and negotiations can't begin until you find someone who has the authority to make this kind of decision.

Different mortgage lenders require different documents for short sales. Document packages typically include a hardship letter, a purchase and sales contract, pay stubs, bank statements and other documents. The lender wants to know as much as possible about the seller's financial situation. A hardship letter provides a narrative about the seller's dire circumstances. In addition to the letter, there will also be plenty of paperwork designed to confirm that the seller is completely broke, is unable to make payments and has no assets or other sources of income.

The lender is also going to be interested in the sales contract between you and the seller. This is primarily to ensure that the seller isn't profiting from the deal in any way. You, as the buyer, should be prepared to pay all of the costs associated with the property sale.

Whether or not a lender will accept a short sale offer depends a lot on the value of the property. During short sale negotiations, you should expect an appraisal or broker's price opinion (BPO) of the property by the lender. They must determine the value of the home before they can make a decision on any short sale offer. If the home has a substantial amount of equity, they may prefer to foreclose and gamble on receiving a higher offer at auction.

They are more likely to approve a short sale when the home has little or no equity. In these situations, the lender may realize it's in their best interest to accept a short sale, closing out the loan for an amount less than the total amount due. You can submit your own appraisal to the lender as well. To strengthen your case for a short sale, include any and all negative information about the property, the neighborhood and the local economy. If you can get a contractor's bid for property repairs, include that too.

Lender approval of a short sale is not a sure thing, so don't be discouraged if your offer is rejected. But if you have a knack for finding pre-foreclosures that fit the right profile, you may want to specialize in short sales and leverage the power of duplication.