Are you a homeowner or a real estate investor behind on mortgage payments? Maybe you’re just a real estate investor curious about investment properties listed as “pre-foreclosure”? Either way, it’s time you learned about selling and buying investment property with the short sale process.
Because the seller and buyer of a real estate investment property are so closely tied together in the short sale process (some might say more so than in other real estate investment deals), it’s a good idea to learn about both sides of the short sale process.
The Short Sale Process Is Easier with a Real Estate Agent
Before learning what is a short sale in real estate investing or how to go about buying investment properties in this way, know that you will need a real estate agent for the short sale process. A real estate agent with experience in the short sale process will make the entire real estate investment deal easier and faster for all parties involved.
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What Is a Short Sale in Real Estate Investing?
When a homeowner or a real estate investor is unable to make loan payments to mortgage lenders, the short sale process could be an option to avoid foreclosure on the real estate investment property.
What is a short sale in real estate investing, then? It’s when a homeowner sells the investment property for less than what is owed to the mortgage lenders. The mortgage lenders have to agree to accept less than what is owed in mortgage payments for the short sale process to continue.
Why Do Mortgage Lenders Allow the Short Sale Process?
Although mortgage lenders take a loss with the short sale process, it’s a better option than foreclosures. Foreclosures are even more costly and time consuming for mortgage lenders. Once the foreclosed home comes under the ownership of mortgage lenders, they then have to deal with selling the real estate investment property. Mortgage lenders often choose to avoid this and approve the short sale process instead.
Why Consider Selling Investment Property with the Short Sale Process?
Just as mortgage lenders try to avoid dealing with foreclosures, a real estate investor should too. Foreclosures hurt your credit score much more than having the short sale process on your credit history. Having gone through the short sale process rather than foreclosure, a real estate investor considering buying investment property in the future will find more financing options.
Selling Investment Property with the Short Sale Process
First, does the investment property qualify for the short sale process? Here is a checklist to make sure it does:
- You need to sell the investment property.
- The investment property is worth less than what you owe in mortgage payments (comparative market analysis will determine this).
- There is a financial hardship that will keep you from making future mortgage payments on the investment property (divorce, loss of job, the death of spouse, illness, or medical emergency).
These are the general qualifications for the short sale process although it may vary from one mortgage lender to another. If you checked all three, then it’s time to start the short sale process.
Step #1: Contact Mortgage Lenders
A real estate investor (or a real estate agent) will have to contact mortgage lenders and find out who is responsible for the short sale process of investment properties. You may have to make a few phone calls, but you want to pinpoint the man or woman in charge (and what they require) right at the start of the short sale process to make it easier.
Step #2: Finding a Buyer for Short Sale Homes
Usually, mortgage lenders require there is an offer on the investment property before they even approve the short sale process. Your real estate agent will be the best resource for finding a buyer for short sale homes.
Step #3: The Short Sale Process Paperwork
The longest step of the short sale process is the paperwork involved. There are different documents a real estate investor must prepare in order to be approved by mortgage lenders for the short sale process:
Letter of Authorization
Mortgage lenders aren’t allowed to disclose any information about a mortgage loan to real estate agents, buyers, lawyers, etc. without the letter of authorization. This letter includes:
- Address of Investment Property
- Mortgage Loan Reference Number
- Investment Property Owner’s Name
- Real Estate Agent’s Name and Contact Info
- Date and Effective Time Period
Preliminary Net Sheet
A real estate agent can prepare this closing statement for you. It includes the following information about potential short sale homes:
- Price Expected from Selling Investment Property
- All Real Estate Costs from the Sale
- Unpaid Mortgage Loan Balance on the Investment Property
- Any Outstanding Payments due on the Real Estate Property (Including Real Estate Agent Commissions)
In the hardship letter, a real estate investor must give the honest reasons as to why future payments cannot be made on the investment property.
Proof of Income and Income Generating Assets
The reason stated in the hardship letter needs to be supported by proof of income and income generating assets. These have to show you will be unable to make mortgage payments. You will have to provide a month of pay stubs for proof of income. Income generating assets can include other investment properties, stocks, bonds, etc. List any savings accounts or money market accounts as well.
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Along with proof of income and income generating assets, mortgage lenders will also need to see two months of bank statements. In order to be approved for the short sale process, any unusual bank account activity (numerous checks, large withdrawals or deposits) will have to be justified.
Comparative Market Analysis
Mortgage lenders require proof that the value of short sale homes in the real estate market is, in fact, less than what is owed in mortgage payments. A comparative market analysis will reveal the value of the investment property in the real estate market.
Your real estate agent can perform comparative market analysis for you by finding real estate comps in the same real estate market as your real estate property.
Listing and Purchase Agreement for the Investment Property
Finally, the listing agreement for the investment property as well as the purchase agreement will need to be given to the mortgage lenders as well. They need to know the investment property will be sold in the real estate market.
Why Consider Buying Investment Property with the Short Sale Process?
Selling investment property with the short sale process is long and complicated; buying short sale homes in the real estate market is the same. So, a real estate investor might wonder why bother buying investment property in this way? With the short sale process, a real estate investor can purchase investment properties for below market value.
Below market value properties can make for some of the best income generating assets. With below market value investment properties, a real estate investor gains equity quickly for a good return on investment when sold. Short sale homes can usually be bought for 5% to 30% below market value.
Buying Investment Property with the Short Sale Process
Step #1: Find Short Sale Homes
A real estate investor can find “pre-foreclosure” listings and short sale homes with real estate agents as well as from the local courthouse or legal ads. Online real estate investing platforms can also provide these listings for short sale homes.
Step #2: Perform Comparative Market Analysis and Investment Property Analysis
The next step is crucial when buying investment property with the short sale process. Sure, these investment properties can be bought for below market value, but what kind of return on investment will they bring? Will they make for a good real estate investment?
A comparative market analysis will reveal just how below market value the real estate property is and if it’s actually a good deal.
Investment property analysis will reveal the kind of return on investment (cash on cash return, cap rate, etc.) that you will get from the investment property. Investment property analysis will also help you determine the condition of the real estate property and the cost of repairs.
Step #3: Secure Financing for the Real Estate Property
Financing short sale homes is similar to any other financing for real estate investing. You may have to get pre-approval or pre-qualification to make the short sale process easier.
Step #4: Negotiate
With any purchase in real estate investing, there is a negotiation. Just because you’re dealing with short sale homes, it doesn’t mean you can’t negotiate offers.
Step #5: Paperwork for Short Sale Homes
While most of the paperwork is put forth by those selling investment property, a real estate investor buying investment property will have to review and sign the purchasing agreement.
Selling investment property and buying investment property with the short sale process may not be easy, but it can be worth it for real estate investors on either side of the process. Before getting involved, learn the basics of the short sale process with this guide and hire a real estate agent to help you along the way. Reap the benefits of real estate investing with the short sale process or save your home from foreclosure! Either way, the short sale process can be a great option for real estate investors and homeowners alike.
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