I’m going to share a lesson here that can be very valuable to you. If you ever do a short sale on a deal, and the homeowner decides to file bankruptcy afterwards, you could have an issue. Let me explain. There is a term you need to be aware of called “reasonably equivalent value”. It deals with properties that are sold within a time period before the seller files bankruptcy, 1 year in my state – this may vary in other locations.
What this simply means; If a property is worth 300k and a seller sells it to you for 250k, there could be a serious problem if the 50k difference was actually equity. You see, the sellers creditors whom they are trying to wipeout via a BK would be REALLY interested in getting their hands on some of that 50k – get my picture here?
When doing a short sale, if you already have a property with significant equity, AND you do short sale on top of that, that’s when you’re at risk. What risk you say? The risk of the Bankruptcy Trustee deeming the sale a “fraudulent sale” and voiding it! Can you imagine the trouble this could make if you have already put a large amount of money into repairs, or if you’ve already resold it – what a mess!
On the other hand, should you do a short sale and buy the property for less than what’s owed on it, and there is little chance the seller could sell it without a short sale and have anything left over, you should be fine. An example would be buying a property worth 400k that had 390k owed it, for a price of 320k and reselling it for 380k. Your resale price was actually less than the original loan amount, so there certainly was no equity there to be had by creditors.
Hopefully, this will help you to avoid this issue, should you ever encounter it.
