Short sale

[LewisCouch]

I have an opportunity to buy an investment property as a short sale. The current owner is looking at foreclosure and needs to get rid of the property.

Can you define and/or comment on a short sale? What should I expect, etc.

Thanks for your consideration.

[gar1976]

Short sale, IIRC, is essentially selling off investment property (stocks, houses, etc.) withing a very short period of time from acquiring them.

Problem you have with the house is when you try to sell it. When you buy a home, the seller pays almost all of the closing costs and real estate commissions, so you never really see any of that info unless you read the HUD statement - which most people don't do. So let's take a look, shall we?

You'll have title fees, title insurance, appraisal costs, flood appraisals, and most importantly real estate commissions. The standard cost is around 6%, which is then split evenly between the buying and selling agent.

So, we'll guesstimate here and say that you need to sell the house for around 10% more than you originally pay just to break even. But you want to MAKE money, right? But since this is short-term, it will be taxed at your normal income tax rate, federal we'll estimate at 25% and state, we'll swing it and go 6%. So, roughly 30% of your profit will go straight to your friends in the government.

Anyways, what I'm getting at (in my oh so succinct way) is that unless the property is a real steal, or you have a buyer lined up (since some houses can sit on the market for a long, long time) , I might want to wait a few days and think it over. Or you could buy it, fix it up, and rent it out. Who knows.

I think this is what you're looking for, might wait for some real-estate gurus to chip in too.

[dpezzo]

Just curious, is a "short sale" the same/similar or different from "flipping" the property?

[DDDDave]

Short sale in real estate means something completely different than in the stock market world.

Short sale in real estate is the situation LC is describing - Someone is behind or in default of their mortgage note and they are willing to sell at a loss to be out from under the note. In this case the seller 'comes out short'.

Obviously this only makes sense for a Buyer if the note is less, substantially less, than the value of the property. The Seller is willing to give up his equity, or some of it, to be relieved of the note. The trick here is valuing the property. A Buyer would need to realistically assess the current market value of the property. My experience has been that if people stop making note payments they stop doing the other things to keep up the property also. Maybe THEY think the property is not worth what they owe on it. Ask yourself, why would the Seller be willing to do this. Job loss, death of a family member, moving to Iraq, whatever. It takes a pretty strong reason not to just put the house up for sale instead of walking away with a loss.

The big caveat is that the holder(s) of the mortgage(s) will have to be paid off. They will not just allow someone to walk away owing them money. They will force the public sale of the property through a foreclosure action and obtain a deficiency judgement from the Seller if the proceeds of the sale are not enough to pay off the note with accelerated interest and costs.

While every situation is different and all the angles need to be considered, it is usually cleaner to buy at the foreclosure auction so you will be assured that all creditors have either been satisfied or discharged. There may be second or third mortgages, mechanics leins, IRS leins, tax leins, etc.

You will need to work with a real estate attorney to make sure there are no other leins or claims on the property before you give the Seller any $$. Are you considering getting a loan to buy the property or are you paying cash?

[LewisCouch]

Thanks for the comments, especially 4Dave; your admonition to buy at foreclosure following debt discharge is good. Just for everyone's edification, this property has been valued at $198K and the note is roughly $150K, making this a steal. The home does need some renovation, however, estimated costs are well below $15K.

If I can ever get the mortgage officer to return my call I will definitely enlist the help of a real estate attorney.

Thanks for your help.