In a depressed real estate market filled with properties that are in foreclosure or heading to foreclosure, successful real estate investing must involve short sales, or negotiating with mortgage lenders to accept less than the mortgage balance to sell a property.
Knowing when to do a short sale is therefore important in putting big pay checks in your pocket.
This article walks you through the process of short sale.
Why do a short sale?
Lenders have more than enough properties that have fallen through that they are trying to sell. They do not need properties, they need to make loans. Each defaulted property in their inventory counts against how much they can lend.
The more properties they have, the less they can lend, and the less profits they stand to gain.
On the other hand, a motivated seller would be better off avoiding foreclosure and bankruptcy by doing a short sale and walk away from the property.
Therefore both the seller and the bank stand to gain through a short sale.
1) Where to get short sale leads
The best time to do a short sale is before a property goes into foreclosure. Depending on your state, from the time the foreclosure notice is filed in court, you could have as little as three weeks to several months before the property is foreclosed.
In general, it takes 2 to 4 weeks to get the attention of the bank. If the offer you make looks attractive to them, they can stop foreclosure.
If your state gives enough time from foreclosure notice to foreclosure, then you can get a lot of leads from foreclosure notices.
If your state does not give enough time for this, then you are better off pursuing regular motivated sellers who may turn out to be behind on their mortgage payments. Then you can do a short sale.
2) Which deals should you short sale?
Depending on your numbers, if you can make a reasonable offer to the bank that can get accepted (such as 80% to 90% of the mortgage balance), and this creates enough equity to make your number work, then you can do a short sale.
I like deals with a second mortgage. A holder of a second mortgage may lose 100% of their investment in the event of foreclosure. They are therefore more than willing to negotiate and can take as little as 10-20% of the mortgage balance.
If you can negotiate both first and second mortgage, it is possible to create a lot of equity easily. This is because each loan will be discounted separately and you end up creating huge equity and profits for yourself.
If there is only one mortgage, the mortgage balance must be low enough to give you a profit if they discount 10-20% of the mortgage balance. Of course lenders can discount more than this but I like to have a safety net that I like to have my numbers fall in.
Tags: foreclosure, mortgage lender, real estate investing, short sale