What Is A Short Sale?
A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from a seller, you are purchasing the property directly from the lender for a discount.
For example: A homeowner, who is facing foreclosure, has an existing ortgage of $300,000. You write an offer to the lender for $220,000, which is accepted as full payment for the loan. This is a short sale.
Why are they willing to take such a discount? Several reasons... First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.
It is best to do a short sale when the property is in the pre-foreclosure state. Yes, you can perform a short sale when the bank owns the property; however, your profits will more than likely be smaller. There are two stages within pre-foreclosure. The first stage being those individuals who are behind on payments and the second stage are those who are behind on payments with a notice of default. In order for this to work properly and for you to successfully get a short sale, you must find the homeowners who are in the second stage of pre-foreclosure or more than 3 payments behind on their mortgage. Once the notice of default has been recorded, banks become motivated as well, so you are more likely to get a discount. Until that time, very rarely will a bank ever discount a mortgage that soon. Why would they? The homeowners still have time to cure the loan and make up the back payments.
It does not matter what type of house or condition it's in, all mortgages can be discounted. The best properties to perform a short sale on are the houses that need lots of work and repairs because lenders will give you a bigger discount if they see they are extremely undesirable. Properties that are over leveraged are also prime candidates. Most rookie investors who see a house over leveraged with an upside-down mortgage may think there is no hope for this property. On the other hand, this is a sweet deal to the savvy investor. Properties with large 2nd mortgages are also treated as gold because the 2nd mortgage is wiped out at the foreclosure auction. Lenders with a 2nd and 3rd mortgage position would rather have something than nothing.
How Short Sales Work
Short Sales are one of the most effective techniques for discounting loans in real estate. Short sales create huge investment opportunities and are a must if you want to be competitive in this market. One of the most important steps in the short sales process is getting the deed. Too many times, beginning investors will skip this vital step. Why do we want to get the deed from the homeowner(s)? Because all too often, homeowners change their minds, or want to back out of deals because they are scared, or they want to re-negotiate. Without the deed, they can back out of the potential short sale even after you have spent hours working on their property. This only has to happen once and I guarantee it will never happen again. When the homeowner signs the deed over to you, now you control the property and you can go to work by calling the bank.
There is a certain process for calling the bank when you’re doing short sales. Banks can usually tell if you've never done this before. When you call the bank, you never want to tell them you are an investor. This one of the biggest mistakes rookies make and will almost always result in the lender not accepting short sales. Therefore, when you call the lender to request the short sales packet, you can either tell them you are the buyer or you represent the homeowner. Sometimes they may ask if you are a real estate attorney. Just restate what you told them before. Then you'll want to request the "short sales packet" or "workout packet". When the packet arrives it will explain exactly what you need to make this short sales deal successful.
The lender will usually request a hardship letter. A hardship letter is telling the lender why the homeowners are not making their mortgage payments. Sometimes they will request bank statement, pay stubs, income statements, and so on. Be prepared to send them everything they ask for because if you don't it will not be accepted. They will almost always ask for a HUD and a real estate purchase and sales agreement. Do not waste any time! Send everything the lender asks for back ASAP. It usually takes 3 weeks or more to get an answer back from the lender, so you can't afford to wait. If the auction is approaching, you can ask to extend the auction which in most cases they will, if they know it is a legitimate offer.
Next in the short sales process is the BPO. This stands for Brokers Price Opinion. Basically a real estate agent will come out and give their opinion on what the house is worth. The key to short sales is the BPO. You want to try everything you can to influence the BPO to come in as low as you can. The lower the better. It takes a few times to get good at this, but once you do, I guarantee you will try to get short sales on every real estate foreclosure you encounter. You will also receive larger profits when you invest in a more expensive home. This is because you are able to get bigger discounts from the lender on properties over $500,000. The great thing about this is that it will cost you about the same no matter what the property is worth.