Today’s REI Classroom Lesson

Today, John Anderson breaks down what a short sale in and how they can benefit real estate investors.

REI Classroom Summary

Homes that are distressed and in need of major repairs are perfect for short sales, if the homeowner is upside down on their mortgage. The real estate investor is able to provide a low offer and the homeowner walks away without having to repay the mortgage.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
John: Hi, I’m John Anderson. I’m the founder of Oyezz Real Estate. It’s a real estate brokerage that specializes in short sales. I also own a HomeVestors franchise in Dallas. The REI Classroom today I will be hosting is about, “What is a short sale?”
Mike: This REI Classroom real estate lesson is sponsored by
John: Okay, folks. What is a short sale? If you go back 10 years ago nobody heard of a short sale. In the meltdown of the economy and the housing market back in 2008, short sales became very common. We learned quite a lot about short sales and have specialized in it. Let me explain what they are and how can they benefit an investor.
To summarize what a short sale is, it’s a situation where the lender or the mortgager takes less than what is owed as a full payoff of the mortgage. So for example, let’s say a homeowner owes $100,000. The house is not worth $100,000 anymore, so it’s sold for $80,000 and the mortgager or the bank accepts that $80,000 as a full payoff of the mortgage. And that’s the key term – it’s a full payoff of the mortgage.
The $20,000 loss is taken by the bank. The homeowner walks away free and clear. The buyer doesn’t owe anything. The bank just eats the loss. And in most cases the lender will not pursue the homeowner for the $20,000 loss. It’s a loss and it’s a ‘get out of jail free card’ for the homeowner.
How it works, basically, is the house has to be upside down in value. In the other words, the house has to be worth less than the amount owned on the mortgage. So for example let’s say, it’s a pretty house worth $150,000 and the mortgage is 100,000, but somebody wants to offer $80,000 on it. The house is not worth $80,000, it’s worth $100,000, so it’s not going to qualify for a short sale.
You think, “Well, how often are house is upside down anymore?” You’d be surprised. If you look at the overall foreclosures across the nation, there’s still tens of thousands per month of foreclosures, and technically almost every one of them could be a short sale. So there’s still quite a few of them that are out there.
For an investor, the short sale can be very handy in the situation where you’ve gone out to a homeowner and they need to sell a property because they are in a financial difficulty and the house is upside down. So you make an offer, you come to find out that the mortgage is much more than what you’re offer is, that’s when a short sale can kick in. Basically again, with this you would go to the lender with your offer
less than what the homeowner owns, which is less than what the homeowner owes, and if the lender accepts it, you’re able to purchase the house at less than what is owed on the mortgage. You get a good deal, the homeowner gets out of the mortgage, and the bank eats the loss. So that’s basically how it works for investors. It’s a good way to get a house at a good price.
Now, this situation truly only works in distressed property situations. That is where the property has physical problems, it’s physically distressed. You know, it’s ruined somehow either a person puts 40 cats in it and ruined it, or it’s got foundation problems, or maybe it’s got major structural or roof problems. If it’s just cosmetics, the lender is typically not going go with that, as far as a good deal goes. They’re going to want full market value for it.
So if you’re in a situation where you’ve got a property that is physically distressed, the homeowner is upside down, and they’re having trouble making mortgage payments, perfect opportunity for a short sale.
Now, how do you get this thing started? I’ll be honest, short sales are extremely complex. There are a million documents that have to be submitted, the bank is going to review it, they’re going to send an appraiser or BPL out to review the value of the property. All of that has to be managed. The best way to get through it is get yourself a real estate agent that is specializing in short sales.
Technically any real estate agent can do a short sale, but you really need to get one that specializes in short sales because if you get just a general real estate agent to do it, 80% of the time it’s going to fail. So get a specialist, and that person will take care of everything for you.
Now, they’re going to get a commission on the short sale. That’s how they’re going to get paid. The lender pays that commission. You shouldn’t have to pay the agent anything. So they’ll get paid by the lender to conduct the short sale, you get the property at a discount, the homeowner gets out from under it, nobody owes anything so it works well. Google ‘short sale real estate agents’ and you’ll find some. And I would suggest you interview them and make sure that they really can do it because anybody can say they’re a short sale expert.
Now, some of the things you may hear about a short sale is that the homeowner has to make up the difference or the loss. Like I said earlier, that’s not the case. 98% to 99% of the time the debt is forgiven for the homeowner by the lenders so they don’t have to make up the difference.
Taxes. I’m not talking about property taxes, but income taxes. If a lender writes off debt, typically they’ll issue 1099 which looks like income and the owner technically is responsible for the taxes on that 1099. Now, in a short sale there are several ways to get out from underneath that 1099. Congress has passed some Acts that allows that debt to be forgiven. In addition, there’s some stuff that a CPA can do to offset that loss. In 99% of the cases, that 1099 is not going to affect the customer so they don’t really have to worry about that. So again, it’s not a problem for them.
The other issues with a short sale, there’s many of them. If there’s multiple liens that can be taken care of. Even if there’s IRS liens that can be taken care of in the short sale. And again, the short sale can end up being a good deal.
If you want more information about how a short sale works and how to go about doing it, you can see it on our website which is, and I’ll spell that to you, it’s, and there’s a plethora of information about short sales and how to conduct them. And that covers short sales today.
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