Short sales are a tricky path into discounted properties – but done properly, they may pay off in attractive profits for the real estate investor. Purchasing short sales requires fortitude and perseverance, but if you’re a flipper, you already have those in abundance! Why are short sales so complicated?

A short sale occurs when a lender is foreclosing on an underwater property and elects to allow the homeowner to sell the property and settle the mortgage for a price that is less than the balance due. If a defaulting homeowner has a $100,000 mortgage balance, but the property is only worth $80,000 in the current market, the bank may agree to allow a sale and release the loan in exchange for the $80,000 sale proceeds. Some short sales can be more complex, but those are the basics.

In this situation, none of the principals are happy, because …

… the homeowner avoids foreclosure but still loses their home, and

… the bank takes a loss (frequently a large one).

The lender agrees to do this because the alternative is worse, for them. Without the short sale, the lender has to go through the foreclosure and auction process, and then manage and sell their REO at a loss due to a weaker market, through their painfully cumbersome process. Or – the lender accepts your timely offer to buy, books the inevitable loss as a short sale, and everyone moves on. Note that the lender, not the homeowner, is making the decisions!

• When and where should you look for short sale opportunities?
  Short sale opportunities are always out there, but real estate investors find more short sales in a market price slump. Clearly the mortgage lender agreed to finance this property when appraisal values were much higher. Now there is little or no chance of recouping the current loan value, and that’s the lender’s motivation to agree to a short sale and avoid the full foreclosure process.

• Find them early in foreclosure process and keep moving timely.
  Short sales are a slow process and it is up to the real estate investor to keep it moving. The clock is ticking for the investor to find the property, manage the paperwork with the homeowner, negotiate, allow the lender their review process (three weeks or more), and then close … all before the auction deadline. If the lender is actively entertaining your offer it may honor your request to delay the auction. Or not.

• Below-market purchase rules still apply!
  Just as with any flip or rental prospect, you need plenty of headroom between your purchase price and the ARV for all the usual costs. Since the lender has to see your low offer as the best possible price, be ready to show a gloomy picture of the property condition and low-priced comparables to help keep the lender’s estimated current value down.

Short sales are not for everyone, but watch for my past and upcoming posts on this subject to learn more.

Do you feel prepared to take on your first short sale investment?

Want to earn money with little or no investment of your own? Keep an eye out for my upcoming ebook explaining wholesaling and how to make it work for you!