Short sales, loosely defined, are any property that is sold for less than the amount owed on it. Short sales were almost everywhere in the years after the real estate bubble burst and many property owners were underwater. Back then it was difficult to invest in them but as the real estate market has started to recover it’s gotten easier. In fact, short sales are still a great way to make a profit in real estate investing—if you are careful.

To invest successfully in a short sale follow these steps:

1)    Learn the rules. Depending on where you live there are different rules governing the resale of short sales. If you want to immediately fix-and-flip a property or rent it out the first thing you need to do is learn the rules of short sales in your area. Know what you are getting into!

2)    Figure out your budget. Before you even start looking for properties you need to figure out your budget. Knowing how much capital you have to invest before you start perusing the market will save you a lot of money in the long-run.  You need to know two numbers. First, how much are you willing to pay for a property and, second, how much will you have left over to invest in renovation and fixes.

3)    Start looking for properties. Look in the newspaper, check the MLS listings, and basically any other place you’d start looking for any property. Bank records (if they are available to the public) and public records are great places to look. Also, many realtors specialize in short sales, finding a good one can be worth their weight in gold. Make a list of the properties that fit in your budget.

4)    Check out properties.  Just like any investment scenario you need to check out the property. Go see the property; take a contractor with you to help you estimate how much money it will cost to fix it and get it inspected. Don’t go into this blind. You need to know exactly what you are spending your money on.

5)    Prepare for a protracted timeline.  Short sales are not known for going fast. Some of them never close. Make sure that you have given yourself ample time for the investment and the process the bank is going through.  Most lenders don’t like short sales because they stand to lose money so they will drag their feet.

6)    Paperwork. There is a lot of extra paperwork involved in a short sale. When you contact the lender make sure to find out what paperwork they need and how you can get it to them quickly. Again, this is where an experienced realtor can be a huge advantage.

7)    Be patient. Short sales may be tricky but in the end you can end up with a great property investment.

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