Selling real estate short

By Joel Persinger (Your Real Estate Dude)

During the boom market we experienced not so long ago, sellers were reaping record profits and buyers were snapping up every property they could find in the hope of getting into the game before home prices were out of reach. In the midst of that feeding frenzy, loan products popped up that made it possible for people to buy homes they could never have purchased otherwise. Often such purchases were made with no money down.

Some folks who already owned homes used such loans to pull out most or all of the equity from their home so they could “invest” in more homes. Being new to the real estate investment business, many purchased homes as “investments” which had negative cash flow. That is to say that the rental income did not cover the expenses associated with the rental house. This means the “investor” would have to go into his pocket every month to make up the difference.

It was a miraculous time in real estate during which many people I talked to spoke of getting rich quick and riding the boom all the way to retirement. But, as history teaches plainly, after every boom there is a bust. Along with the market slow down has come a long line of troubled home owners. Many are in a financial bind with their personal home, others with an “investment” property and some with both. In many cases, the owner owes more on the property than it would sell for in the current market. The owner cannot refinance because he already owes too much on the property and he can’t sell because he can’t sell it for enough to pay off the current loans. The property owner is truly between a rock and a hard place. Quite often the property has to be sold to avoid eventual foreclosure. When this happens and the property must be sold for less than what is owed on it, it is called a “short sale” or “selling short.”

There are an astounding number of people in this unenviable position at present. I showed some properties to clients a week or so ago in Oceanside and was amazed at how many “short sales” we encountered. Of the ten homes we planned on visiting that day, five were being sold short. The sellers were obviously in financial distress and I am sure they would have loved to have my clients offer to purchase their homes.

The problem is that selling short is a very complicated and challenging thing to do. Among other things, it requires the approval of the lenders in questions. As you might have guessed, lenders are not thrilled about losing money. Gaining the lenders approval can be an exercise in jumping through multiple hoops of fire. There are also potential tax consequences, damage to the seller's credit rating and a host of other issues that must be dealt with in order to get the property sold.

The bottom line is that selling a home short is not for the faint of heart. Neither is it for the inexperienced real estate professional. If you are forced to sell your property in a short sale, my advice is hire a seasoned professional Realtor who has experience with short sales. Don’t forget to also seek both legal and tax advice before you proceed. If you are selling short, you have a perilous road ahead of you. The last thing you want is to get waylaid by unforeseen dangers along the way.