The Long and Short of Short Sales

by : Travis Millward

A "short sale" happens when the real estate market will not support a price for property that is equal to or higher than the current owners' debt on the property plus any Realtor fees, taxes, and closing costs. The homeowner would have to bring money to the closing table to sell the home. Unfortunately, the most widely known

alternative is foreclosure.

Short sales are another alternative for the homeowner and they also provide opportunities for a savvy real estate investor.

Here's an example:

Mark and Heather bought a home for $400,000 with 80 percent LTV (Loan To Value) financing. Later they opened a home equity line of credit and used the remaining value in their home of $80,000. A year later they decided to divorce, and Heather moved out. Heather stopped contributing to the mortgage payment.

Mark decided to sell the home and discovered the market value is only $380,000. So if they were to sell the house and get the full value of $380,000, they would have to pay the difference between the loans against the property and the selling price, in this case $20,000. They would also be responsible for any taxes, closing

costs, and any Realtor commissions, which could be as much as another $25,000. They don't have any money. Mark and Heather are in a "short sale" situation.

The lender or bank's loss mitigation specialist estimates that a non-judicial foreclosure will cost Mark and Heather about $5,000. Plus there are $2,000 in property taxes due. The property is worth less than the mortgage and with these additional costs, the bank will suffer a serious loss.

With no money, Mark feels he is on a sinking ship and stops making the mortgage payments. Soon he is in a pre-foreclosure situation.

A real estate investor, Tom, approaches Mark and Heather and then the lien holder (the bank holding the mortgage) and offers to buy the

house for $290,000. Everyone agrees, Mark moves out and the closing takes place. Now the savvy real estate investor has a property with almost $100,000 of equity.

What happened behind the scenes is that Tom borrowed the funds to pay the bank from a private mortgage lender, Mary. Mary uses her

self-directed IRA to loan money to real estate investors. She earns a competitive rate of interest on the loan. Everybody wins.

A 'short sale' is when no one gets the 'short end' of the stick.