Real Estate Investing… The Art of the Short Sale…

If there ever was a time to buy real estate, it’s now. According to some experts, this is the best time to buy since the Great Depression. Not only that, but there’s no end to desperate sellers out there who just want to get rid of their problem – called a house!

There’s one problem, though. Especially if you’re considering buying residential real estate, there’s probably a loan in place. That loan might be bigger than the value of the house! It’s often at least as much as the value of the house. So, how can you get a deal when someone has a loan on the house you want to buy that’s at least 10% over the real value of the house?

Enter the Short Sale.

What is a Short Sale?

A short sale occurs when the lender who lent the money on the house you want to buy accepts less than the remaining principal of the loan as payoff for the loan. To really understand this, let’s look at an example.

Suppose Mr. and Mrs. A bought a house and paid $220,000 for it. Let’s say they had $20,000 for a down payment, which resulted in their loan being $200,000.

Unfortunately, Mr. A lost his job and fell behind on his payments. Then the recession hit, and made matters even worse by devaluing what Mr. and Mrs. A can sell their house for. Let’s say their house lost 15% of its value. So now they can sell it for slightly less than $190,000.

They’re only two months away from being foreclosed on, and they desperately want to sell their house. They’re willing to lose all their equity in the house. They just want out.

You see the house and compare it with other houses that have sold in the area. You decide the house is worth $180,000 tops. You contact Mr. and Mrs. A, and they’re willing to let you have the house for that. There’s just one problem…their lender.

Here’s where the idea of the short sale enters the picture.

You contact the bank and tell them you would like to buy the house and that you’re willing to pay all cash. (Whether you’re borrowing that cash or not is not the issue. It’s all cash to the bank.)

You fax them your analysis of neighborhood prices and tell the bank that you’re willing to pay no more than $150,000. That’s a $40,000 hit for the bank, but guess what? If they repossess the house and have to resell it themselves, they’re going to be losing a whole lot more.

So after going back and forth, the bank decides to let you have the house for $165,000.

You’re happy because you just bought a $190,000 house for $165,000. That’s about 85% of its real value. And when the market comes back, which it will, you’re set to make a real killing.

Mr. and Mrs. A are happy because now they can finally start moving on with their lives and get a fresh start.

The bank is happy because they’ve got a non-performing loan off their books and also because they didn’t quite take a complete bath on this loan.

That’s a short sale and that’s how they work. Now, let’s look at a few details.

How to Find Short Sales to Do:

This is actually easier to do than it was even five years ago. Used to be there weren’t that many foreclosures so finding them took a fair amount of advertising on your part. Now, unfortunately, there are a ton of foreclosures. There’s also a lot of foreclosure advice online to help you out.

The first thing you need to do is to decide what part of town you want to invest in. Then you need to get in your car and ride that part of town just to become familiar with it. As you ride around notice which real estate agents are active in that area.

If you’re going to do a short sale, you need to come across as a real investor, not a “wanna-be” and not a tire kicker.

So, the next thing you should do is to call a few of those agents, tell them you’re interested in the area, and ask them if they have any properties with desperate sellers. You can be sure they do!

Arrange a meeting with the agents you liked and who seemed to be the most professional. Sit down with them and tell them what you do.

It used to be that most agents hadn’t even heard of a short sale, but nowadays it’s a fairly common thing. So, if this is your first deal, you don’t necessarily have to tell the agent that, but for goodness sake, don’t lie. That will come back and haunt you.

There’s no sense in having the agent drive you around like they do home buyers who are looking for their next residence. Just tell the agent that you will honestly honor their commission on whatever property you decide to buy and see if they will give you a list of houses that are in foreclosure or are about to go in foreclosure.

Next, drive around and look at those houses. Call a few other agents while you’re driving so you can get a feel for the general prices.

When you find a few you want to see the inside of, contact the agent who directed you to the house. Always honor the agent! They can be an enormous resource to you.

Now, when you find a possibility, get the agent to do what’s called a competitive market analysis for you. Then talk to the agent about getting the lender to do a short sale.

From that point forward, it’s all paperwork.

Get Your Ducks in a Row:

Before you go filling out offers and bidding on houses, you need to make sure of a few things.

One, how are you going to pay for the house? A lot of first time investors use the equity in their own house to get started. Do you have enough equity to pay for the house outright? Or do you need to supplement this with a loan.

If you need a loan, you’ll want to talk with a banker before you actually see any houses. You don’t want to waste your time, and you don’t want to waste other people’s time. Ask the banker how fast they can close on the loan once you locate the house. A lot of lenders who are doing short sales expect a quick closing. As a matter of fact, a quick closing is a real selling point for them and gives them a reason to discount the loan even further.

Another thing you need is a general knowledge of the costs of repairs, or at least someone who you can get to go see the house and give you some estimates.

Often houses that are in foreclosure or are nearing foreclosure are in disrepair. Look at it like this. If the sellers could pay to fix the leaky roof, they could probably pay the house payment. Before you buy the house, you want a rough estimate of how much it’s going to cost to fix the house up. You don’t have to renovate it, but you do have to bring it up to the normal standards of the neighborhood.

What’s Your Exit Strategy?

Chances are you’re not buying this house to live in yourself, although you could. Chances are this is an investment for you. If that’s the case, you need to figure out in advance what you’re going to do with the house.

Do you want to just flip it for immediate cash? Well, that’s easier said than done, unless you’re in a particularly hot neighborhood, or unless you’re willing to sell the house at a discount.

You can do this, by the way, if you get a great deal from the lender. But if the deal’s not that good you could end up losing a few thousand by flipping it immediately.

If you’re going to flip it, then how much work do you need to do to it and how long will that take? Don’t forget to figure in the cost of your loan during that time.

Most likely, you’re going to either rent the house or offer it up for a lease purchase.

Both of these are excellent exit strategies in today’s market. You can rent it until the market comes back, then you can sell it for a huge profit. Or, you can lease purchase it now to someone who can’t qualify for a loan just yet.

Either way, if you buy the house right, you make out like a bandit!

Conclusion:

Short sales are not really that hard to do. You just have to know your numbers before going forward. Don’t let emotion rule you. Don’t buy a house for more than you decided to. Just fix a maximum price then negotiate. If the lender goes for your deal, then great. If not, then that’s fine, too. You just move on to the next potential deal. There are plenty out there!