The Truth About Short Sales 2

What do you do when you're interested in real estate investing, but have most of your capital tied up in stocks and other investment vehicles? Consider a short sale. A short sale in real estate occurs when the outstanding obligations (loans) against a property is greater than what the property can be sold for. It's a negotiated settlement between a mortgage broker and yourself. This could very well be your ticket to more money in a relatively short amount of time. According to investor D.C. Fowler, “This powerful technique allows you to acquire real estate for up to 40% below market value with no money down, and gives you the opportunity to create instant profit and equity on every deal.”

So where do you begin?

Many investors don't really understand how to successfully negotiate a short sale. It is more than submitting an offer and waiting for the bank to respond. Certainly, if all goes well, your offer will be accepted, but in most cases, it's not that easy. A strategic plan is a must. You need to discover a way to make the real estate deal go in your favor by persuading the lender to agree with your offer. There are several steps that will help ensure your success when negotiating with lenders:

First, decide if you really do have a short sale opportunity. Contrary to popular belief, not every homeowner facing foreclosure is a prime short sale candidate. You must know the difference between a good and bad deal.  Next, don't take no for an answer. If the lender refuses your offer, you must learn why. There must be a reason. Perhaps the offer was too low, or maybe it was due to another reason. Ask questions and find out how you can meet their objectives and develop a win-win position.

Buying a short sale directly from the owner

Sellers in foreclosure usually don't decide to sell as a short sale on a whim. They first compare the amount they can get from the sale of their home compared to how much they actually owe. If their mortgage balance is greater than their home's market value, then maybe the seller will choose to sell as a short sale. Sometimes, some of the short sale sellers decide to sell without representation, and are known as for-sale-by-owner sellers.

This is where legal representation comes in. You want to protect yourself as you make the best deal possible. Both the seller and the buyer should have a real estate attorney.

It saves you money in the long run. Interestingly enough, in some states the seller may be able to sue you after closing and once again have control of their property. That's not a good deal, to say the least. It would put you in a position where you would have out of pocket expenses such as legal fees, court filing fees, plus the possible loss of your investment property. Knowing this, always have an attorney by your side, even if the seller does not.

Crafting the short sale offer

Decide on your offer price. Write contingencies on your offer such as:

1. Asking the seller to give you written authorization to speak with the lender
2. Subject to a home inspection
3. Subject to your loan funding
4. Subject to an appraisal
5. Subject to your approval of a preliminary title report.

Submitting documentation and purchase offer to the lender

When the seller has accepted your offer, send it to the lender for approval. You don't have a deal until the lender accepts. Also send the lender a copy of your earnest money deposit, but don't be shocked if the lender asks you for more money.

Ask the seller to write a hardship letter and have it sent to the lender. This is important because before the lender will consider your offer, he or she will want to be assured that the seller doesn't have any assets to attach. Many lenders will want additional information as well, such as:

1. A pre-approval letter from your lender
2. An estimated certified closing statement and instructions
3. Your preliminary title report, as we mentioned
4. A list of comparable sales
5. Evidence of your earnest money deposit
6. Your profit and loss statement

Your negotiations will rest on the comparable sales and the very condition of the real estate market. Lenders usually utilize an automated appraisal service, which might not reflect the true market value. So be ready to point out why factors such as close proximity to power lines, railroads tracks, busy streets, or high numbers of neighborhood foreclosures affect its value. Use these reasons to justify your asking price.

Another tip? Be certain to check public records. This research is essential before you make the offer. Your representative can find out who is in title and whether or not a foreclosure notice has been filed and how much is exactly owed. This is important to know so you know how much to offer.