The House Flipper’s Guide to Great Short Sale Deals
Finding a flip that is a good deal is hard.
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The biggest reason for the difficulty is the intense competition — particularly in markets that are hot, as many are today. I have tried hundreds of strategies to find and secure good deals for a flip, including cold calling, making a bazillion offers, voodoo, praying and other superstitious antics.
The best strategy by far has been creating a pipeline of short sale deals.
There are still plenty of short sale deals to be had out there, even though prices are rising in many areas. A short sale is a type of real estate sale where the seller/owner of the house sells for an amount that is less than the amount of their loan.
How a Short Sale Works
For example, let's say you bought a house for $100k. If you got a traditional mortgage you would put something like 20% down, or in this case $20k. The other 80% or $80k needs to come from somewhere. The answer is that it will come in the form of a loan from a bank. If you sold your house for $100k, the next day you would (less fees, commissions, etc.) get $20k back, and the bank would get their $80k. However, if you sold your house for anything less than the $80k that you owe the bank, then it would be a short sale deal, and you would need the bank's approval to go through with the sale.
In the years before the financial crisis of 2008, many people were getting loans from banks and putting down 3% or less, instead of the usual 20%. Let's say that this house you bought went from being worth $100k to closer to $50k. It seems drastic, but it happened all over the US. In this scenario you now "own" something that is worth $50, but you owe $80 on your loan. In other words, you are now underwater.
Even if housing prices go up 50%, you are still underwater. Doesn't seem fair, right? If they drop 50% and then increase 50%, then one should be equal. Not true. If they drop 50% from $100k, then your home is worth $50k. If it increases 50% from $50k then it is only worth $75k. Remember, your loan is still $80k.
So assuming you are underwater, you have three basic choices: keep paying your mortgage, foreclosure, or short sale.
Many people get discouraged paying a mortgage for a house that is hundreds of thousands of dollars underwater, and it is likely not a good use of your precious funds. Getting foreclosed on is easy — just don’t make any payments and wait until someone like me shows up at your front step and tells you to leave. This process could take longer than a couple of years, so make sure to save up!
The other option is to do a short sale by selling your house for less than you owe. As I mentioned, the key in a short sale deal is that the bank needs to approve to sale.
Using a Short Sale to Your Advantage
Anyway, back to the point of how to make money and get a great deal on a short sale. The first thing to know is that the owner/seller is in control of who the home is sold to. The bank can’t run around trying to find a buyer — only the owner can. The bank ultimately has to approve the deal, but they can only approve deals that the seller/owner brings to them.
The other important piece to understand is that in a short sale deal, it can take a really long time for the bank to approve the price. You need to be patient and stick with it. Also know that other buyers may not have your patience. Talk to your agent network and see if any short sale deals have buyers that are getting antsy. The goal is to step right in afterward and replace a buyer who falls out.
Usually the bank will give a deadline on the approved amount, and as long as you can close quickly, you can step right in!
Finding Short Sales in Your Area
A great way to find people who are underwater is to use ForeclosureRadar or any myriad of sources that list public foreclosures. Chances are that if their home is listed for foreclosure sale that they are underwater. Create a flyer telling people that you want to buy their home, possibly with the help of a real estate agent friend, and go around sticking them into mailboxes of people on your foreclosure list.
This isn’t a high percentage game — most people won’t respond. However, just a couple of short sale deals a year can make you quite the bundle of dough.
Once you find a seller who is willing to sell their short sale home for a good price to you, make sure to have a beer and congratulate yourself — for about ten minutes. Then you need to get back to work because the bank still needs to approve the deal. You want to have contractors already bid everything you are going to fix so that you are ready to go when the home closes. A lot of times banks will counter back on the price and so you need to know exactly what your costs are going to be.
Finding good flip deals is hard, but the formula is doable. Pound the pavement and be resourceful.
Where do you turn for the best deals on your flips?
Let me know your experiences in the comments below!