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Monday, September 17, 2012

An Overview Of Real Estate Investing Strategies – Short Sales

Short sales are currently one of the hottest strategies in real estate investing right now, for a variety of fundamental reasons. But the record market for short sales may be coming to an end soon, as the tax exemption for imputed income will expire at the end of this year. This means that come the dawn of 2013, home sellers will be liable for income taxes on short sales.

A short sale simply means “selling short of what is owed on the note”. When a bank agrees to short sell a home they are agreeing to accept less than what is owed on the loan balance.

Short sales used to be very rare. Prior to the housing market crash, they were almost unheard of. But in the past two years, banks have really stepped up approvals of short sales to help move the backlog of foreclosed homes.

Schematic representation of short selling in the two steps
(Photo credit: Wikipedia)
This is currently a very popular buying strategy for real estate investors, because fundamentally, the large inventory of foreclosed homes combined with a very high percentage of delinquent home owners in danger of foreclosure has forced the banks to sell more homes this way.

For investors looking for cash flow or cash profit on a resale, a short sale is currently the only way to add real equity to a property that is worth less than is owed on the mortgage. In short, investors and savvy buyers can use short sales to create equity where there is none. But relative to other strategies like holding rentals for income, the window of opportunity is relatively short. And once the mortgage forgiveness debt relief act expires at the end of 2012, this strategy could see drastic reductions in home owner participation.

From the point of view of the banks and home owners, short sales are currently a hot selling strategy, because of the ability to create equity. A bank that is willing to approve short sales can move a lot of properties at present, even though housing sales are still near the record lows. With home prices barely edging upward in most cities, short sales are a necessary strategy for sellers at this point in time. According to Realty Trac, about 34% of all home sales in 2012 have been short sales. This is an unprecedented number that will not last more than a few more months if the market continues to pick up. And the expiration of the tax exemption is looming large. Given the long time frames involved in getting short sales approved by the bank(s) involved, sellers are quickly running out of time.

However, barring any big recovery in housing, short sales will continue at higher than normal levels until the market sees a true increase in end-user, owner occupant buyers. Investors are buying lots of homes and driving up the sales numbers and price statistics somewhat, but they are not end users. An end user tenant or buyer is still needed to get the housing market back on a stable growth track. That won’t happen until job growth really takes hold.

Buyers need reliable proof of funds to close short sales successfully. Yes it is possible to “flip” short sales at a profit if you are an experienced investor. Since you are dealing directly with banks and lenders, you’ll be expected to be able to prove that you have access to funds to close the deal as part of the approval process.

As noted above, market fundamentals such as unemployment and high foreclosure rates are supporting the high percentages of short sales activity. But short sales are not really impacted so much by property fundamentals such as location and condition. At present we have a rare set of market fundamentals in play that have combined to make short sales one of the hottest buying and selling strategies around, at least for the time being.

By Donna S. Robinson - 17 September 2012
Donna S. Robinson is a real estate market analyst, investor, author and speaker located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog on her at Realty Biz Consulting. 

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