Can a Hard Money Lender fund a “Short Sale”
The answer is YES.
First of all, let’s talk about what exactly a Short Sale is.
The phrase can mean different things depending on if it is used with regard to real estate or in the context of shorting stocks. For this purpose though, let us define Short Sale in the real estate context only.
Simply put, a short sale happens when the proceeds of the sale are less than what is owed on the existing loan. At first, this would sound like the main parties to this transaction – namely, the owner and the bank would be at the losing end. Ironically, short sales ultimately benefits them both. They even benefit the community and the economy.
The procedure of a short sale transaction is pretty straightforward. The owner must first be willing to cooperate. The owner brings on the services of a short sale specialist (SSS). The specialist coordinates with their bank and the seller to get their property sold for as much as the market will bear. The SSS will assess the property and come up with a price they feel the bank is most likely willing to take. If the bank agrees and buyer is found, the bank is then paid off at a discounted amount and the seller relinquishes all rights to the property.
On the surface this sounds like the bank and the seller are going to be the big losers in this transaction. In the end this actually benefits the neighboring community, the lender, the person selling the home, and believe it or not the economy in general.
The 64,000 question is “why do banks enter into short sales and how is this advantageous in the end”. Obviously, banks determine the property’s present value and after realizing it isn’t worth what the owner owes them, they would rather short sell and recover now than let time pass and incur more expenses due to foreclosure and other costs. On the other hand, the owner/ borrower avoids foreclosure. In doing so the impact on their FICO score is significantly less impacted.
With the property being sold, albeit short of what is owed, the community will eventually benefit as it is protected from declining value arising from problems with crime, vandalism, squatters and deferred maintenance on vacant properties. It helps the community and the economy by improving property tax values.
Once the property is under contract and the bank has agreed to the purchase price a Hard Money Loan can be arranged. The major difference is the time it takes for the approval process. Just because you find a short sale today does not mean it will be ready to start the loan process quickly. You may be waiting for upwards of six months or longer for bank approval.