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Tips for a Short Sale for Investment Property

written by: Melanie Bremner•edited by: Donna Cosmato•updated: 9/27/2010

Are you worried you are going to lose even more money with your investment property? Not sure how you can manage to pay the mortgage or avoid bankruptcy? A short sale of investment property is an option that is available for owners who have problems selling and need an option to avoid bankruptcy.

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    Tips for a Short Sale for Investment Property

    When you are in the business of buying and selling homes, the last thing you want to have to do is a short sale of investment property. A short sale is when you need to sell the property for less than what is owed on the mortgage because you can no longer afford to carry it. While this does not happen very often, with the recent drops in some real estate markets, it is best to know what to do in these situations.

    Here we examine some tips for what to do if you find you are going to need to settle for a short sale of your property.

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    Advantages of a Short Sale

    With a short sale, there are advantages for the lender, seller, and buyer. The buyer has the opportunity to buy a home at a discounted price. The seller has a chance to sell their investment property and stop worrying about getting deeper in debt or going into bankruptcy. Thus, the lender can save money because the seller does not default.

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    Asses Your Property Value

    In order for you to determine if a short sale would be the best option for you, you need to consider a few options. You need to find out what the current market value is for your property. Usually, this can be done with the help of a real estate agent. They analyze the other homes in your neighborhood and find out what they are worth. If you do not have or want to get a real estate agent involved, you can go to online real estate sites to find that information. Once you know the value of your investment property, you can compare the value with the amount you still owe on the mortgage.

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    Be Sure to Work With a Qualified Lender

    If you decide that a short sale is the best way for you to proceed, you need to work with a lender. This means that you need to gather all personal information such as bank statements, income verification, and tax returns. The lender may want you to write a letter indicating what the changes are in your circumstances, or the reasons why you cannot pay the mortgage. You will want to ask other people or professionals to find a lender who has a proven track record of being reputable, honest, and reliable before you opt for a specific one.

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    Understanding the Process of a Short Sale and the Taxes Owed

    Each city, state, and county has different terms that apply to short sales and taxes owed. When a seller works out a deal with the bank to sell the property for less than is owed, taxes are still applicable to the lump sum of the investment. The United States government passed a law in 2007, called the “Mortgage Debt Relief Act,” which resolved this issue and made it easier for sellers to avoid further losses. In 2010, there was talk about reinstating the taxes needing to be paid on private homes while investment property and vacation homes may still receive some tax breaks. It is best to consult your financial advisor to discover what the current short sale tax issues and requirements are for your area.

    While having to go through a short sale is not something anyone wants to do, if it can be avoided, knowing that the option is available when needed can take a lot of stress and pressure off a discouraging situation.