A short sale occurs when a lender agrees to take less than the
balance owed on a property. Let's say you find a seller, who is behind two
months on his payments. You figure the house is worth $140,000 AS IS, but
you find out that the seller owes $130,000. With only $10,000 in equity,
most investors would conclude that there's no deal here. But what if you
could increase the equity in this property to $40,000?
A short sale can turn a dead lead into a good deal. If the seller and
the lender are agreeable to a short sale, you can literally create additional
equity by negotiating a price that is lower than the loan balance. Using
the scenario above, let's assume that you offer $100,00 for the $140,000
house. If the bank agrees to accept your offer, then you just created an
additional $30,000 in equity and got yourself a deal.
Banks do short sales because foreclosing on a borrower is
expensive. Lenders are more motivated to accept short sale offers
when they believe that it will be difficult to liquidate the property.
Therefore it is actually better for the investor if the property needs repairs,
or has some undesirable factor that makes it harder to sell in the eyes of the
bank.
Some investors will advise against shorts sales because: It can be
difficult to work with lenders, it is quite time consuming, and most
attempted short sales fail.
One
of my best deals was a short sale. If you find a highly motivated seller,
but there isn't enough equity, bring the deal to me. If
I buy the house, you get a referral fee on a dead lead.
Not bad.
