Real Estate Investing Short Sale Tips

January 29, 2009 | By | 2 Replies More

Real Estate Investing Short SalesI get a ton of questions from the blog from investors that have a lead that looks something like this:

Seller owes $230K, and the property is only worth around what’s owed or less. The property is facing foreclosure. Homeowner just wants out from under the debt. And the investor wants to know how to make a deal out of it.

Enter the Short Sale

First off, let me explain what a short sale is. A short sale is when a bank accepts less than what’s owed as payment in full. You may be asking, “Why would a bank accept an offer like that?”

For a bunch of reasons! Banks are in the business of lending money and collecting their interest payments. They are not in the house collecting business. Banks do not want to foreclosure on properties and add them to their inventory. For every house a bank takes back, it limits the amount of the money the bank can lend back out. Which is where the bank makes its money!

My Experience With Short Sales

My third year investing full time, we decided to go heavy into short sales and make that our main niche. At first, no matter what the situation, if a homeowner was facing foreclosure and owed to much for us to buy it as is, we would try to work a short sale.

And if you’ve ever worked a short sale before, you know that the name “short sale” doesn’t describe the time frame that goes along with the process very well. The “short” in short sale describes the bank’s loss, not  how long it takes to get one approved. In other words, they can take a loooooonnnnnggg time!

We got plenty of short sales approved but had many more that didn’t end up working out. All the time that I was spending on deals that didn’t work out was driving me insane. I was on hold with every bank you can think of for hours each week following up with our huge pile of short sales we were working.

Anyway, I finally got to a point where enough was enough! I was sick and tired of trying to make a deal out of every lead that came across my desk. So, I decided to start being picky.

Two Main Criteria I Use When Evaluating Short Sale Leads

1) Is the property in short sale condition?

One of the main contributing factors to getting a short sale accepted is making a case to the bank that the property is in fact worth less than what’s owed.

By “short sale condition,” I mean the property looks like it needs repairs. If you can show the bank that the property is in disrepair and needs extensive work to be in marketable condition, you have a much better chance of getting an acceptance.

2) Is there an inferior lien(s)?

Does the property have a second mortgage, a judgement, tax lien? You want to look for scenarios where you could discount an inferior lien to create a deal.

It’s much easier to discount these type liens because there is a high probability that the lien holder could get wiped out at the foreclosure sale and received nothing. It’s also typically a much easier process. They require less paperwork and can make a decision much quicker.

My Take on Short Sales

For me to take on a short sale lead, the lead has to meet at least one of the criteria above . . . preferably both.

Now, I will say this . . . “Is it possible to get a short sale accepted if the house is in excellent condition and only has one mortgage on it?”

Absolutely! But in the interest of my time (and sanity), I disqualify every lead that I can and only work the leads that have the highest probability of turning into deal.

Short sales are a great way to create deals. And they’re easier to do than you think. If you’re working a short sale deal and have any questions, submit them in the comment area of this post. I’ll help you out.

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Category: Real Estate Investment Buying Strategies, Tips and Tricks

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  1. Tony Sena says:

    I understand that an investor wants to get a very good deal for it to make sense for them to invest in a property but after reading your blog post, I have one question. Who is negotiating on behalf of the seller with the bank?

    As an investor, price is very important and if you get the bank to agree to that price, chances are the bank/lender will require the seller to pay a certain dollar amount up front or over a period of time to approve the deal. Where as if the seller has a short sale real estate agent representing them, there is a better chance the seller won’t have to pay anything.

    Tony Sena’s last blog post..The Las Vegas Real Estate Market: Has it “Over-corrected”?

  2. Patrick Riddle says:

    That’s interesting. I’ve always negotiated the short sales for my company and the sellers have never had to pay anything. The seller can’t receive anything either though (at least not on the settlement statement).

    I have worked out loan modifications before that required the seller to pay something up front or over time but not with a short sale.