Short Sales: Make Money on Deals That 98% of Investors Would Pass On

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Real estate investing is a competitive business. There are lots of talented people looking for the same awesome deals.

A few fundamentals will always result in incredible deals:

1. Dig harder than your competition
2. Research confusing entities and legal descriptions
3. Clean up messy titles
4. Track down hard-to-find sellers
5. Have a better/more unique exit strategy than your competition
6. Be early to the hot areas

But one thing remains true with all of the above items—you make your money on the buy.

Time can heal most mistakes in real estate, but if you don’t have enough cash reserves to wait out your mistake, you may lose the property. Create a buying strategy that has considerable equity capture at the time of purchase; put this point at the top of your list.

But what do you do in this scenario? You have a seller. The property has deferred maintenance and is in a good area. But the balance of the loan is just too high.

Maybe the seller is just ready to get out of a bad situation? They would walk away without any profit just to stop making payments.

Or maybe they’ve already stopped making payments, and a foreclosure is looming large! Can you make money on these deals?

The answer to these questions and the solution to your problem is called performing a “short sale.”

What Is a Short Sale?

As the name implies, a short sale occurs when a property is sold short of what is owed—sometimes dramatically shorter. I’ve had deals that I had over 68 percent of the loan balance written off!

This meant taking a deal where there was no equity and creating a very healthy spread. It resulted in me having multiple exit strategies and making an over 144 percent return on my investment in 30 days. (If you’re tracking with me, that’s a 1,728 percent annual return.)

Yes, this deal was an exception, not the rule, but you get the idea. Understanding the lender negotiations/short sale process is very important to being a successful investor in today’s market.

Related: Short Sale Investor—Not All Real Estate Short Sales Are Created Equal

Short Sale Real Estate: Step by Step

Knowledge about the short sale process sets you apart from the vast majority of real estate agents and investors, because the process isn’t simple or quick. It takes persistence, an organized process, diligent follow-up, and attention to detail. But the returns, in my opinion, are worth it.

Here are the basic steps in the process:

1. Find a property with zero or even negative equity and an owner that just wants out! Because a lender is taking less than what is owed for the property, the owner isn’t allowed to make anything on the sale. There are ways to potentially get them something called “relocation assistance,” but that’s another topic for another day.
2. Submit a short sale packet to the lender as soon as you can (and as much time before a foreclosure as possible). If you are right up against the foreclosure sale date, most lenders aren’t going to be willing to start the short sale process.
3. Get an appraisal on the property to establish its true value and not the loan payoff amount. This is a very important step, because it’s what the lender will use to begin recalculating the value of the property. Obviously as an investor, you want this number as low as possible.
4. Get an approved short sale price. Does this new number allow you to purchase safely with equity capture?
5. Close on a property that was passed over by 98 percent of your competition

Now this is a very short, very simple overview of the short sale process. Full disclosure: it usually take three to four months and a dozen or more calls to the lender.

You also need to ensure you’re providing a complete and detailed paper trail to help the lender understand your seller’s situation and why you’re asking them to take thousands less for the property than what is owed.

Related: Does the Short Sale Have a Future?

The Truth About Short Sales

Is this process for everyone? No, probably not. But there’s still hope! You can partner with a short sale negotiations company, which will work with you on qualifying the seller and doing all the follow-up with the lender.

You’ll obviously be splitting the profits with them, but it still allows you to have a profitable solution to almost every situation and every seller who comes across your path. I personally love short sales, because it’s one of the most rewarding facets of real estate investing.

A short sale is so much better than a foreclosure for the seller. Usually this will go on their credit report as a “deficiency payment.” This results in a much smaller drop in their credit score, and they can actually qualify for a new mortgage just two to three years later. In contrast, a foreclosure can take you out of the game for five to 10 years!

So next time you’re contacted by a desperate seller who wants out of a deal and doesn’t have any equity, remember the short sale option. It just might result in a highly profitable deal and a seller who is forever grateful for your efforts.

What other questions do you have about the short sale process? 

Ask me in the comment section below!

 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.