What Can Go Wrong When Investing in Short Sales

Real Estate Agent with Excellence in Real Estate Tm @ Allison James Estates & Homes

What Can Go Wrong When Investing in Short Sales
by John Occhi, Hemet CA REALTOR
Mission Grove Realty

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There are many opportunities for Real Estate Investors today and it seems like the latest buzz word is SHORT SALE.

There are a several very good reasons for this.

1) They are in abundance: Just about every street in Hemet and the rest of Southern California either has had a short sale, has a short sale in progress or will have one in the next year. Not only are they abundant today, but the well is deep; and

2) They are a very lucrative market where the investor can literally create a handsome amount of equity out of thin air for about 20 to 30 hours of work spread out over a month or two; and

3) It doesn't take a brain surgeon or rocket scientist to figure these out. This means they are relatively easy to facilitate, as long as you can keep yourself organized and be faithful to a timeline; and

4) If done properly, these really are one of the easiest ways of controlling property and profiting from it without any money out of your pocket. I know, you've watched the late night infomercials and bought programs before, but I'm talking about legitimate opportunities that are all around you and really can be structured with no money out of your pocket.

Short Sales Are Not a Piece of Cake or a Walk in the Park

Just because Short Sales are abundant and easy enough to learn with minimal risk does not mean they are for everyone or that short sales don't fall apart at the last moment.

Let's examine the most common areas of a Short Sale deal falling apart.

1) NOD - The only time a short sale will take place is when the homeowner is in default and has started the foreclosure process. Prior to the NOD being filed, the lender is still optimistic that the loan relationship can be salvaged. Without a Notice of Default, there will not be a short sale.

2) Need or Hardship: The homeowner must be able to document a legitimate hardship. The lender will not grant a short sale just because the borrower is upside down and wants out. They must be able to prove that they cannot afford the home, under any circumstances. The homeowner needs to be cautious, because if they stretched the truth in obtaining their loan and now provide conflicting information from what is on the loan application the borrower may be providing the necessary documentation and evidence to convict them of mortgage fraud.

3) Junior Loans: There are typically a second or even a third loan that must be negotiated along with the first. There may also be tax liens and other encumbrances against the property that must be negotiated.

4) BPO: The BPO or Broker Price Opinion is similar to an appraisal, conducted by a local REALTOR. The lender will use one, two or three of these to determine the actual current value of the property. It is always best as the buyer to be present to help influence the BPO. If the BPO comes in too high, you will never get your deal through.

5) Lenders Approval: The Short Sale is 100% dependent on the lender buying off on your short sale package and offer. What you present has to make sense. Remember, you are trying to convince them that your offer is better business than taking the home back and selling it as an REO property.

6) Repairs: One of the most critical aspects of buying any investment property is determining what the cost of the repairs will be. If the home is totally thrashed, that is OK as long as you take into consideration the actual cost to rehab the property. This doe not mean that you are going to rehab it, but whoever does cannot turn up and hidden problems. Spend the time and know the property before you lock yourself in.

7) Tax Consequences: There will be times when a homeowner balks at a short sale offer when they consider the tax consequences that they may have to endure. Current law calls for the mortgage lender to send the IRS a 1099 for the debt that has been written off - reporting it as taxable income. This single reason scares more homeowners into delaying; thinking they can find another way out - only to have the foreclosure precede and they still end up with the tax bite.

All of the above obstacles can be overcome, if they are raised. Knowing what they are ahead of time and determining how you will handle each ahead of time is an excellent strategy to move foreword and close multiple preforeclosure short sale deals each and every month.

Hoping to make your California Real Estate Investment...
A Pleasant and Profitable Experience,

John Occhi, Hemet CA REALTOR

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Until Next Time, Have a Blessed Day,

John Occhi, ePRO & Five Star Certified REO REALTOR®
Hemet - San Jacinto Valley, CA
The Excellence in Real Estate Team @
Allison James Estates & Homes
2281 W. Esplande Ave, #102-B
Next to "Starbucks"
San Jacinto CA 92582
(951) 654-5550

Excellence in Real Estate,Team Log,John Occhi,www.johnocchi.com,hemet,san jacinto,CA

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This blog and the contents written here is the intellectual property of John Occhi, San Jacinto Valley REALTOR® in the South West Riverside County region of the Inland Empire of Southern California.  The views and opinions expressed are just that - views and opinions of John Occhi and those who comment.  Please note that I am not an attorney or a tax professional and any time I discuss either topic, I suggest you consult with the proper professional for relevant assistance.

This blog is part of the ActiveRain Real Estate Network, which is a social network highlighting the best of Web 2.0.  Information is provided with the intent of educating and assisting home owners, home sellers, home buyers and real estate investors with information the can be used to make better real estate decisions.

I am proud to be a full time REALTOR® who is proud to be a contributing member of the ActiveRain community.

Comments (4)

John Occhi
Excellence in Real Estate Tm @ Allison James Estates & Homes - San Jacinto, CA
ePRO, Five Star Certified, Riverside Cnty REO Expert, 951.443.6259

Tax consequences are always an important aspect to any short sale.

I just had one fall apart, because while we were in negotiation with the lender, the IRS filed a 6 figure tax lien on the homeowner.  Even if we had the time to negotiate with the IRS - which is NOT my speciality, then there was still not enough in this case to work out.  Unfortunately, the auction date is at the end of this month and anything short of a miracle will not be able to rectify this situation...unfortunate for this family.

Hoping to make your California Real Estate Investment...
A Pleasant and Profitable Experience,

John Occhi, Hemet CA REALTOR 
Realtor Consultant to Foreclosure Investors
Mission Grove Realty

Aug 19, 2007 06:20 AM
David Petrovich
S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

My position has been a speculative investor makes the worst buyer of a preforeclosure short sale UNLESS the property is in under and/or uninhabitable condition, a sheriff's sale is eminent, or the lender is willing to take a serious bath.

In my experience, the spec investor's objective is opposed to the sellers' and mortgagees' position... except they share in the desire to transfer title to avoid foreclosure.  The rest is a matter of price.  The buyer wants to pay as little as possible, while the lender wants to maximize its recovery.  These days, the divide between the two is great.  A higher sales price is in the seller's interest since forgiven debt may be taxable... and paying less tax is more desireable than paying more.

Aug 21, 2007 04:14 AM
Joe Dallorso
Ocala, FL
Ocala Real Estate
Thanks for the info. I need to learn more about short sales as I can see a lot happening in our market in the very near future.
Aug 24, 2007 10:50 AM
John Occhi
Mason Real Estate - Temecula, CA
SRES,CPRES.ePRO - Temecula-Murrieta CA Real Estate
Joe Dallorso - Glad to help, there is a lot of good info here in the Rain on the topic - so study away.  You'll find I have a number of articles for you on the topic.  You are right to get ahead of the curve if you can.

Hoping to make your California Real Estate Investment...
A Pleasant and Profitable Experience,

John Occhi, Hemet CA REALTOR 
Realtor Consultant to Foreclosure Investors
Mission Grove Realty
Aug 24, 2007 12:58 PM

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