Before the great housing collapse of 2008-2010, few people besides those directly involved in the real estate market knew much about specialized real estate deals such as short sales. But as mortgages collapsed and the number of foreclosures mounted, these kinds of sales made headlines across the country. Are short sales a low risk option for investors following the income property guidelines of Jason Hartman?

A short sale situation occurs when a homeowner owes more on the mortgage of a dwelling than the market value. In these circumstances the dwelling can be put up for sale to rescue the drowning homeowner before they default completely on the mortgage and the property goes into foreclosure. Most importantly they have to demonstrate a real hardship in trying to sell the house and be motivated to choose the short sale option. But the lender, the entity who holds the mortgage, must approve the sale.

The seller, usually the homeowner, plays a big role in the short sale process — they must supply a packetful of required documentation and make the home available for showings, open houses and other sale-related needs. Since short sales are usually the last resort before foreclosure, most sellers are motivated to close the deal quickly and take care of all the necessary aspects of the short sale.

Short sale homes are frequently snapped up by house flippers, buyers who pick up short sale or foreclosed homes for low prices and, after a minimal fixup, quickly put them back up for sale, making a fast profit in the process. The sellers are usually desperate and, especially in states where the lender may forgive the difference between the selling prices and the actual mortgage, they can avoid foreclosure and the remaining mortgage debt with a sale.

Short sales also attract mortgage fraudsters, who misrepresent the need for a short sale by “flopping” the house – deliberately defacing it to force a short sale, or who put pressure on desperate mortgage holders to apply for a short sale as a quick way out of debt. Although federal regulatory agencies attempt to investigate these scams, not all of them are caught.

For legitimate investors looking for low-cost investment income, short sales are a viable opportunity. But not all distressed houses are good candidates for short sales. The property must be a single family home or a multiplex of four units or less. The seller must also demonstrate why a short sale is needed. In the world of short sales, timing is everything, since foreclosure looms on the horizon for most of these homes. Though mortgage fraud affects a relatively small percentage of distressed properties, sales that are questionable in any way, such as an extremely small turnaround time, or filling out the lender’s short sale package incorrectly, can raise red flags.

Short sale homes can be a viable opportunity for investors seeking to build a portfolio of income properties quickly. But for a return on the investment, rather than a quick turnover, the property must be sustainable as a rental to tenants for a long period of time. To create rental income from short sales of the right properties, it’s important to observe Jason Hartman’s advice to get educated and seek the advise of qualified experts in all the relevant fields. (Top image: Flickr/LennyMontarus)

The Jason Hartman Team

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