Purchase Short Sale without going thru the short sale process

7 Replies

Any advise or strategies on purchasing a property that is listed as a short sale without going thru the short sale process, i.e., take over payments.  What are the steps to this strategy? AlsooOpen to any other ideas.

When you say 'listed' do you mean it is on the MLS with a Realtor? If so, anything other than a regular purchase through the short sale process is a no-go, unless this Realtor is up for creative scenarios. If not on the MLS, be careful if the home is in the pre-foreclosure stage, in other words, if their lender has started the foreclosure process (takes just 3-4 weeks in my state), in some states it is illegal to take a property 'subject to' the existing financing, so check with your (or more than one....) attorney on that. If it's not listed, not pre-foreclosure and they have some equity, that's the best scenario. You may be able to still make it work even if there's no equity but the monthly payment allows for some cash flow via rental and you plan on hanging onto it for an extended period. Also, watch out when taking a property 'subject-to' because many states consider this a transfer taxable event, so as the property goes into your name, or the name of a trust you decide to use, you may be liable for transfer tax - not a huge deal, but something to be aware of. As always check with your attorney on this and any other advice you get on BP or elsewhere....... hope this helps! :)

@Pamela Baker You don't want to go through the SS process without finishing it. Otherwise you're buying a property with considerable negative equity. Plenty of better deals out there.

Unfortunately, a short sale means the seller just needs to get the property off their hands. You could try for a master lease option strategy or seller financing. 

The property is upside down.....why would you want to take on a mortgage more than the value of the property?

After looking further, the property is listed on the MLS, and is in foreclosure status. Looks like there is also an auction date. I'm assuming it is listed as short sale to stop the foreclosure.

Yes. you're right, Pam. It's probably listed as a short sale to stop the foreclosure.  

Here's how the process works. If a property owner doesn't pay their mortgage, after a couple months, the lender starts the foreclosure process by filing a notice of default. This is a valid time to get in as an investor and take over payments, catching them up on the mortgage, etc.

If they don't catch up, there is a sale date scheduled at some point, and the property is sold at auction. However, this scenario assumes that there is equity and it will sell at auction for at least the amount of the first mortgage, so the lender can get their money back when somebody else brings in cash.

If somebody (probably the homeowner) recognizes that the value of the property is less than the principle balance on the mortgage, the auction becomes unlikely, because nobody will buy it for more than what it's worth. then the homeowner and the lender kind of work together to do a Short sale. A short sale is basically permission from the lender to sell the house for less than the principal balance, or what is owed on the home. The official permission may take a while to get, because they have to do all their own analysis, and red tape and blah blah blah.

In the meantime, the homeowner is living in the house without making payments. and it's listed with a real estate agent for a price that the homeowner and the agent think is fair. Any offer made on that property can be accepted by the owner, but that doesn't mean much because the BANK has to approve the price because they're taking the discount on the principle balance. This is where the delays come in again.

Sometimes short sales can be profitable. But if you're coming in as an investor to a short sale situation, it means you're very late into this transaction. It means they are probably 6+ months behind AND the property is worth less than is owed. SO to clean up the mess of all the back payments only to buy a house that is not worth what is owed... There is no upside for the investor.

In fairness, the banks are willing to work with you sometimes, but red tape and blah blah blah, its mostly not worth it. Especially if you don't understand the process, or how to work with a bank, and the house right next door can be had at 10% below market.

Hope that was informative.

A short sale is when you settle debt on a property for less than full. This is the only way to do a short sale. 

If there's another method of acquisition that makes sense still when a home is upside down then that can be attempted too. I'm sure some people have done subject-to deals on underwater assets because it made sense with a low cash entry point plus benefits of cash flow or anticipated future appreciation.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here