Other Considerations about the Short Sale
There are many so-called short-sale experts on television and on the Internet championing the profits available for investors closing short-sale transactions. In reality short-sales are a lot of work, often fall through, and are not nearly as prevalent as the gurus would want you to believe. Lenders are not likely to give you the $30,000 to $40,000 just because you asked for it. While you can make a profit with a short-sale transaction, it will not be as large as gurus profess it can be.
Additionally, almost all short-sales transactions are cash sales. Seldom will the lender approve any purchase agreement with an assignment clause. Most lenders, before accepting a short sale, are likely to ask for proof of funds from you. They want to see that you have enough money on hand to close the transaction.
The Property's As-Is Condition
The current condition of the property is a primary concern for the lender. The BPO will guide the decision to accept a short sale. The more problems with the property, especially if it is in a deteriorating neighborhood, the more likely the lender will consider a short sale. Owning properties that are going to be tough to sell and need significant repairs is not what the lender wants.
The Hardship Factor
Most lenders have a rigorous hardship test that borrowers must pass before they will consider a short sale. In most cases the defaulting borrower must be experiencing one or more of these financial hardships:
Death of a spouse, and without the spouse's income the borrower is unable to make the monthly loan payments.
Divorce and the borrower has been abandoned by the spouse. Without the other spouse's income, the borrower could not make the monthly loan payment.
Serious catastrophic illness has wrecked the borrower's personal finances.
One of the borrowers has been called away for active military service.
The borrower's employer has gone out of business, and high unemployment in the area prevents the borrower from finding similar employment.
The borrower has been incarcerated and can no longer work.
The borrower has become insolvent and has no realistic way to make payments now or in the future.
The borrower has been injured, or is so seriously ill that working again seems unlikely.
Providing photographs of the as-is condition can help speed along the negotiation process. The pictures can support your value of the property. The more deficiencies the lender's representative can see with the property, the more likely your offer will be accepted.
Private Mortgage Insurance Factors
Lenders require borrowers to pay for private mortgage insurance. It insures against the lender's loss in the event that a loan is foreclosed.
The insurer may be the one that decides to accept or reject a short sale.
The lender may make a claim against the mortgage insurance. At that point the insurer might advance funds to bring the loan current or purchase the loan from the lender. Another option for the mortgage insurer is to approve the short sale and reimburse the lender for any loss up to the amount of the coverage.
The lender will require that any short sale be an arm's length transaction. That means the buyer cannot be a family member, relative, or friend of the defaulting borrower. The lender does not want someone close profiting from the loss. If a lender finds out later that it was not an arm's length transaction, it will likely file a lawsuit to rescind the sale.
FHA and DVA Short Sales
Federal Housing Administration (FHA) short sales are called pre-foreclosure sales. The FHA has established substantial guidelines and regulations about short sales that are available at
Investors are not permitted to bid on HUD properties during the first offer period. HUD, as part of its mission, prefers to offer and sell its foreclosure properties to owner-occupants. If an owner-occupant buyer is not found during the first round of bidding, HUD then offers their properties to both owner-occupants and investors.
Properties acquired directly from HUD are a different kind of short sale. With these properties you will not be dealing with the former property owner. Rather you are simply offering to purchase the property for whatever you offer.
The Department of Veterans Affairs (VA) short sales are called compromised sales. According to the VA, when the borrower is unable to sell his or her property for an amount greater than or equal to the current outstanding loan balance plus closing costs, the VA may pay the difference to allow the sale to take place. Compromise sales are approved if the sales contract meets several criteria and results in a cost savings compared to a foreclosure. These factors must be considered:
The property must be sold for fair market value.
The closing costs must be reasonable and customary.
The compromise sale must be less costly for the government than foreclosure.
There must be financial hardship on the part of the seller.
There must be no other liens, second mortgages, or judgments unless the amount is insignificant. In situations with other liens, the seller can request that the lien holder consider releasing the lien and converting the loan to a personal loan.
The seller must obtain a sales contract in order to be considered for the program.
To protect the seller's interest, the seller should make the sales contract contingent on the approval of the VA.
When awarding bids, HUD considers the bottom line: what its net proceeds will be on the sale of the property. Bidders seeking fewer concessions have the advantage.
See Appendix D for a listing of the Department of Veterans Affairs regional loan centers.
