What Is a Short-Sale?

Everywhere you turn, there is another seminar, another guru, or another boot camp, all teaching different ways to do short-sales. Can so many people be right? How many different ways can there be to do the same tiling? There are not 100 different ways to do short-sales; there is one way, and everyone is trying to put a spin on it to seem original.

Completing a short-sale is not difficult: Through simple negotiations you get the bank to accept less than what is owed on a property. For example, you find a homeowner with a property worth $100,000 that has a $50,000 mortgage balance. You work with the bank to negotiate a discount on the payoff. The bank agrees to accept $50,000 as payment in full. You have just completed your first short-sale.

The Four Parties Involved in a Short-Sale

Is it really that simple? You bet! The key to successful short-sales is to understand the mind-sets of the people involved and make the deal appealing to each of them. There are basically four parties involved in a successful short-sale: you the investor, the homeowner who is interested in getting out of foreclosure, the bank that wants to get a bad debt off its books, and the rehabber or landlord who buys the property from you at a discount. Of course, you can choose to hang on to the property and do the rehab yourself, and then rent it out or sell it for retail. In each situation, there is a win-win outcome.

Let’s start with the homeowners. Their motivation is obvious. They are behind in payments or already in foreclosure. They are getting called by creditors, banks, attorneys, mortgage brokers, and more every day. They just want to be able to sleep at night and get out from under the stress this situation has placed on their lives. Their downfall is that they have no equity. They have called every investor in town to try to sell their house and have been turned down by everyone because they have no equity. They call you and you say, “No equity? No problem!” You explain the short-sale concept, get the property under contract, and get busy.

Why would the bank accept less than it is owed on a property? After all the bank could take the property back at the sheriffs sale and then sell it for a retail price. Well, let me ask you this: Are banks in the business of lending money or owning homes? Correct, lending money. Is a foreclosure an asset or a liability? Right again, a liability. The banks borrow money from bigger banks and then lend it to you. They have to show their credit report, just like you do to get a low interest rate on the money they are trying to borrow. If you were going to lend millions of dollars to a bank, would you lend your money to the banks with the low default rates or the banks with the high default rates? Of course, you would lend to the banks with the smallest number of defaulted or foreclosable loans. The bank’s motivation to accept a short-sate is to clean up its books so that it can borrow more money, at a cheaper rate, and then lend it to you.

Where do rehabbers and landlords come into play? If you don’t want to fix up a property yourself or keep it, you need someone to flip the property to once you negotiate a successful short-sale. Rehabbers and landlords are the perfect outlet. Rehabbers like to purchase fixer-uppers at no more than 65 percent of the retail value. Landlords like to buy at no more than 80 percent of the retail value. In the case of the $100.000 property, a rehabber wants to buy it for no more than $65,000 while a landlord might pay as much as $80.000.

So. how do you get the bank to say yes? You build a great case. Think of it like an attorney defending a case. The better case you build, the better your chances are to win. Send as much information as you possibly can to the bank to show the bank why it should accept your low offer now instead of waiting months to creep through the foreclosure and bankruptcy process and get the house later. 

How do you build a good case? Send the following:

• A sales contract, signed by the homeowners for the amount you want to offer the bank
• An “Authorization to Release Information” form
• Comparable sales (comps) that justify your offer
• Pictures of all the disrepair
• A detailed list of repairs needed
• A hardship letter written by the homeowners, backed up with proof such as late notices, shutoff notices, bank statements, job layoff papers, medical bills, tax returns, or whatever you can find
  Reports of crime in the neighborhood
• A list of sex offenders in the area
• Newspaper articles showing negative trends that could hurt real estate prices: job layoffs, crime, natural disasters, foreclosures up, bankruptcies up, and whatever you can find that is detrimental to the neighborhood
• Net sheet showing what the bank would receive after closing costs
• A cover letter from you stating why you couldn’t possibly pay full price for the property

Submit that information to the loss mitigation department of the bank, and you are in business. The rep will negotiate with you, and once you settle on a price, you can wholesale the property to the rehabber. You become the intermediary and keep the difference between what you negotiated with the bank and the rehabber.

Short-sales are that easy. There are millions of dollars being left on the table. Get busy and put some of that money in your pocket.