Real Estate Investing Basics

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

Expertise:
10 Articles Written
investment-thinking

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

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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.

Aerial view of the big luxury homes on the hill during a vibrant sunny summer day.

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!

 

Christopher Gill is a real estate investor and serial entrepreneur based out of San Antonio, TX. Starting with just $15,000 in working capitol in the past 5 years he’s owned millions of dollars worth of residential and commercial real estate. Come hang out and let's talk real estate!

    Brian Costanzo from Frederick, Maryland
    Replied 3 months ago
    How do I find sellers like this??
    Catherine Coy from Huntington Beach, California
    Replied 3 months ago
    Well, Brian, you can actually find them in the Multiple Listing Service. There are 34 of them in Orange County, CA, where they languish on the market for as long as 944 days. Why? Because the shorting lender wants full retail price. Here are the MLS comments regarding a SS that went on the market today at a list price of $717,000. PRIVATE REMARKS: Subject to cancellation of current escrow. Bank’s appraiser values property at $717,000. HOA holds title but there is a first trust deed that requires a short sale. Property sold AS IS, with significant cosmetic, plumbing and possibly electrical issues. An unpermitted repipe was done around the exterior – see photos. There is a fourth bedroom upstairs that does not have a closet. Buyer to verify all information. In case of a short sale, lender determines terms, final price, and commissions. Any reduction in commission is split 50/50 between brokerages. Condition of property dictates that a cash buyer is required. A turnkey model match sold recently in the same subdivision for $750,000.
    Christopher Gill Real Estate Agent from San Antonio, TX
    Replied 3 months ago
    Catherine, but to execute on many of the short sale exit strategies you want to find them before they are on MLS. We pull lists of properties that are delinquent in payments and have a low equity. Few investors go after these potential sellers because they don’t understand the short sale process. If you’re willing to put in the work it can be low hanging fruit, and the sellers are very motivated!
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    it is impossible to do a short sale without the property being listed in the MLS for fannie mae, freddie mac, fha, va, usda which makes up 92% of all mortgages. the rest are non GSE MBS. those MBS tranches are owned by the big investment banks. i have never encountered one that did not require listing in the MLS. most states the notice of default is not recorded with county records. the public document is the notice of trustee sale for non judicial and judicial foreclosure. Christopher is short on details and that raises lots of questions and alarm bells are going off me.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    regarding commission, if the promissory note is owned by fannie mae, freddie mac, or insured by FHA or VA , then the loan servicer is precluded from cutting broker commissions as long as the total commission paid to both brokers does not exceed 6%. the great thing about CA is the non deficiency statute for short sales.
    Kristopher Devers from Kailua Kona
    Replied 3 months ago
    Thanks for the post…any recommendations for short sale negotiating companies?
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    you the investor should not be choosing the company. it should be seller. as the investor your incentive is a low price which detrimentally increases the seller’s loan deficiency and tax liability for the cancelled debt. most states require that the short sale negotiate is licensed to practice in that state.
    Bruce Kinser Investor from Orlando, Florida
    Replied 3 months ago
    In my experience the lenders will demand that a short sale home be listed thru the MLS…so your investor will not have a shot at it. If he works hard at getting the appraisal lowered he would only be helping others get the discounted property.
    Christopher Gill Real Estate Agent from San Antonio, TX
    Replied 3 months ago
    Bruce, this is correct. You will need to find an agent to work with. 95% of the time homes must be listed on MLS.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    This is a very high level view. Some information is not clear. Here are my comments and observations. The post is not clear and it seems that the buyer may be negotiating the short sales. I would highly suggested not doing that. In WA State and other states that is considered the practice of law. WA state requires the short sale negotiator have a valid WA real estate agent license or WA law license. That is the case in most states. When the buyer negotiates the short sale that is a conflict of interest detrimental to the seller. The buyer wants a lower price which increases the amount of the deficiency. The buyer could be liable for a bad outcome such as recourse deficiency or tax liability. The seller’s cancelled debt is considered an economic event or income that is subject to income tax. Some states have distressed real estate conveyance laws. Most short sale programs today wont allows for the buyer to negotiate the seller’s short sale. That would include all the GSEs or government sponsored entity loans which make up about 90% or all mortgages. Almost all have documentation that the parties sign attesting to an arm’s length transaction, no hidden or side agreements, exchange of money outside of closing (RESPA violation). The documents are signed under federal perjury law. I have seen been actors prosecuted. Fannie mae, Freddie mac, fha, va all have post close flipping rules recorded in the deed preventing the resale within a time period such as 60 days.
    Kristopher Devers from Kailua Kona
    Replied 3 months ago
    Great insight….very informative…mahalo
    Guillermo Kennedy New to Real Estate from Leonia, NJ
    Replied 3 months ago
    Thanks all! Michael P. – great information regarding some of the legal aspects of negotiating a short sale. I am curious about Freddie/Fannie Mac, FHA, VA setting post close restrictions on flipping shorts sales 60 days after purchase. Does this mean that the buyer cannot participate in any resale activities (e.g. rehab, renovate, or marketing of property) until 60 days after the close of the short sale OR just the actual sale of the property is prohibited within 60 days after purchase? Thanks!
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    Guillermo, the time period restriction is only for the transfer of title. the new owner is free to do any rehabilitation or remodeling, marketing, etc. any restrictions are spelled out in the loan servicer’s or promissory note owner’s documentation.
    Edgar Martinez Real Estate Agent from Buffalo, NY
    Replied 3 months ago
    Great macro view. This is definitely enough information for someone to use as a jump off point and do further research.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    Edgar, be careful. quite a bit of the information regarding short sales on the internet is not correct. i have run across quite a few strategies i would consider to be fraud.
    Christopher Smith Investor from brentwood, california
    Replied 3 months ago
    You make money at every point along the value chain.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 3 months ago
    We used to do a lot of short sales, but sometime around 2010, they really dried up (banks got stricter) and I haven’t heard of them loosening since. Maybe they have, but I suspect they won’t until the next market correction.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    Andrew, around 2010 the landscape changed which removed a lot of opportunity. short sales went for years. The CFPB put in place loss mitigation rules that all bank and non bank lenders must follow. fannie mae, freddie mac, fha, and va put in place better valuation processes which means there was less opportunity for investor (buyer) arbitrage. all the GSEs require an interior appraisal and an interior BPO and they use AVM to reconcile values. it is virtually impossible that the lender will screw the valuation in favor of a buyer/investor.