Investor's Guide to Selling Your Property in a Short Sale
Sometimes even the best laid plans run into issues. Market's can turn direction, rehab costs can balloon, and rental markets can change, leading to real estate investments gone wrong. If your investment plans aren't going well, and you now owe more than your property could sell for, you may be considering a short sale.
A short sale allows you to sell for less than what is owed on the home, with the lenders approval. However short sales for investors are more complicated than short sales for owner occupant homeowners. Investors will have stricter guidelines for qualifying into a short sale, and are far more likely to be asked to contribute to their short sale approval via promissory notes or cash contributions.
SHORT SALE TIPS FOR INVESTORS
Tougher rules to qualify for a short sale:
- Remaining current on payments during a short sale will result in a decline 99%+ of the time. While owner occupants get more leeway on this, almost every loan requires that an investor owner will have to be in default on their mortgage in order to be approved for a short sale.
- Investors will face extra financial scrutiny, especially if they have lots of extra cash and assets. A portion of any non-retirement liquid assets exceeding $10,000 will generally be requested as a condition of the approval. Some prior financial planning may be required if you see a short sale in your future. In order to limit your losses, it is absolutely critical that you speak to a seasoned Short Sale Realtor with experience dealing with these types of short sales well in advance of listing your property as a short sale.
Getting through the short sale process:
- Every lender requires that a short sale property be listed on the MLS by a licensed Realtor as a condition of the approval. Forget about FSBO as it will get you disqualified for a short sale, and also choose your Realtor wisely. Your listing agents fees will be covered out of the proceeds of an approved short sale so there is no additional out of pocket expense to having an experienced professional handle this for you. Your short sale Realtor is the single most important party to making sure you get through the short sale successfully.
- Deal with your tenants. If the property you are selling is most likely to be purchased by someone wanting to live in the home (most single family homes), it is best to vacate your tenants prior to listing the home, or at the very least have them on a month to month tenancy and be prepared to have them gone by closing. If your property is a traditional investment home (a multifamily or apartment building), try to organize your income/expense records and eliminate troublesome tenants to increase odds of successful sale.
- Be aware that the lender will want you to get as close as possible to market value for a sale price of the home. The lender will order an appraisal to determine the current market value for the home and the buyer will have to be at least somewhat in line to that number in order for the sale to be approved. Huge discounts from market value won't be possible.
Approval and closing:
- Once you are close to approval, your lender may make requests for cash or promissory notes, especially if you have larger cash assets. Hopefully you were well advised in advance and are prepared for this. Know that almost always these can be negotiated down.
- 1099's and tax issues. Most investors ( Fannie Mae, Freddie Mac, FHA) have a policy of full debt forgiveness with a successful short sale. Portfolio loans may have different rules, so it is very important to understand how the deficiency will be handled. If your debt is fully forgiven (as in most short sales) you will receive a 1099 at the end of the year citing the forgiven debt as taxable income. For sellers of primary residences, there are tax exclusions available to avoid paying taxes on this forgiven debt. This exclusion does not apply to investment properties, so it is important to understand what tax ramifications you may have, if any.
- Most lenders have overlays for writing new mortgages to folks that have short sold recently, so count on not being able to get another mortgage for at least 2-3 years following your short sale.
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Minna and her team got a deal done that I believe no one else could have accomplished. Minna and her team are the best and I highly recommend her for her short sale knowledge and professionalism. You honestly can't go wrong with Minna!
R.M.
Last Updated on December 6, 2025 by Minna Reid
