Before the great mortgage crisis of 2008 – 2011, relatively few people outside the real estate community knew much about specialized terms like ARM or short sale. But as more and more houses fell into foreclosure, these words made headlines across the country. And even now, with large numbers of homeowners still barely staying afloat with mortgages, short sales continue to dominate real estate news.

The practice of short sales has broadened considerably since the start of the housing collapse in 2008 because of attempts by many homeowners to avoid the full foreclosure process. Since short sales are frequently the target of flippers, who buy houses cheap, do fast, minimal repairs, and immediately list them for sale again, making a quick profit in the process, these properties move in and out of the market at lightning speed.

A 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.

How does this affect legitimate real estate investors? Although the percentage of flopped houses and other kinds of mortgage fraud in the whole short sale market is quite small, this kind of scam can put legitimate deals under scrutiny if they appear fraudulent in any way. Many new solo investors working with Jason Hartman’s investing principles are buying distressed and foreclosed properties, many of which are short sales, to launch their investing careers. And although short sale regulations vary from state to state, individual investors may be affected by the next new way to defraud the mortgage industry.

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 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. Also, although 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.

The American Monetary Association Team