6 Steps to a Short Sale

If you’ve found your way to this hub, it may be due in part to the buzz around short sales generated by the influx of infomercials geared to enticing newcomers into the real estate investing arena with promises of quick cash and large profits with minimal work and little to no financial investment by the investor (you). Many self-proclaimed gurus claim to have the right “system” to establish you in this business, but the information can be costly and usually comes in the form of an up-sell to a mentoring program or other marketing device, such as specialized software designed to assist you in preparing your short sale package for the bank. This isn’t to say that this type of advertising is entirely sketchy, or even that the claims are over-hyped or inaccurate; it merely serves as cautioning that some marketers cloak their products in tidbits of overly broad, vague information in hopes of separating you from your hard-earned money through the progressive up-sell. That being said, this article is intended to provide anyone interested in becoming a real estate investor with a more solid knowledge base before entrusting large sums of money to any particular system.

A short sale is simply a tool designed to aid lenders and owners in unloading a property when foreclosure is imminent. A short sale occurs when the owner owes as much or more on the mortgage than what the property is worth, and the lender is willing to sell the property to you (the investor) for less than the mortgage because it may mitigate the costs associated with foreclosure. Often, there is little (if any) equity in the property and the owner is burdened by such financial hardship that there is no other viable remedy. As a result, real estate investors are presented with an opportunity to assist overburdened owners, and in return receive a profit, which in some cases may be highly lucrative. However, as with most ventures, there are a number of steps involved in becoming a short sale investor.

To begin, you first must identify pre-foreclosure properties in your lead geographical region. There are a few ways in which you can do this, some on your own and some with the help of a team: (1) scour the real estate section of the local newspaper (printed/online); (2) comb through online databases, such as craigslist ; (3) drive around neighborhoods in your selected area and look for “For Sale by Owner” (FSBO) properties; (4) place ads (printed/online) for properties; (5) hire a birddog to locate FSBO properties for you; and (6) network with realtors, brokers, lenders, and real estate investor clubs in the area. Keep in mind that this list is not all-inclusive, but a starting point for identifying prospects.

(Another article will follow later providing more specific guidelines on how to utilize these resources. )

The next step is to contact the owners of the properties you’ve identified in order to determine if the property is an ideal candidate for a short sale. In essence, this is “cold calling”; and, if this aspect fills you with dread, then short sales may not be a good fit for you. Your initial contact with the owner should be one that champions your sincerity that you wish to assist the owner through this difficulty, and should never be equated with high-pressure sales tactics that push them to short sale. For example, some investors will begin the interview by compassionately asking if the owner has exhausted the available remedies for foreclosure prevention; if not, the investor then provides a list of resources to the owner and encourages him/her to investigate the options. This not only ensures an ethical approach to the short sale, but it creates trust and builds a relationship with the owner that will lead to future opportunities for you.

However, if you determine that foreclosure prevention is not an option for the owner (and you should be prepared for this), then the initial contact becomes your property assessment appointment in which you evaluate key factors necessary to begin negotiation with the lender.

(Another article will follow later providing more specific guidelines on how to conduct the initial interview and which questions are vital to the negotiation process.)

The third step in this process requires you to contact the bank (lender) that holds the mortgage on the property. This occurs only after you have obtained the pre-foreclosure information from the owner and verified the property value. When you contact the bank, you will need to ask for the “Loss Mitigation Department” (or its equivalent), and request to speak with a bank officer who has the authority to negotiate a short sale on the property. It’s important to remain patient in this phase, as some customer service representatives may not know who to transfer you to and the process of locating the authority may take time. (It’s a good idea to do your research and check the bank’s website as the contact information may be prominently listed.) Once you reach the proper authority, the bank officer will be able to inform you of the information necessary for the lender to be able to negotiate; this is often referred to as the “Short Sale Package” and many banks today provide a link to their packet on their web site.

(Another article will follow later providing more specific guidelines on how to conduct the initial interview with the bank officer.)

The fourth step in a short sale is to secure funding. Funding, oft times, is seen as a major hurdle for most incoming investors. However, there are a variety of ways in which to obtain the all important “proof of funds” letter to be included in your short sale package: (1) bank loan; (2) private equity; or (3) transactional funding. For purposes of this (and subsequent) article, the focus here is on transactional funding.

Transactional funding is a method of funding your short sales for double (back-to-back) closings. The funding is provided by a lender specifically for this transaction, and receives a percentage or specified amount of the profit for providing the funding (the percentage or specified amount varies on the length of coverage for the transaction). Again, here you will want to perform your due diligence and conduct comparison research on a few agencies before determining which to utilize for the transactional funding (“proof of funds” letter).

Preparing your short sale package for the lender (bank) is the most important part of this process. Remember, your offer will be one of many on the property, so it’s extremely vital that you pay close attention to the accuracy of the numbers and ensure the packet is complete. Each bank has their own list of documents that they require for the short sale package (you can conduct early research by checking the web site of larger institutions). However, there are a few documents that are common to all short sale packages: (1) owner’s hardship letter; (2) financial statements; (3) proof of funds letter; and (4) HUD-1 form. Again, this list is not all-inclusive, but highlights key documents for the successful acceptance of your offer.

(Another article will follow later detailing specific documents for your short sale package.)

It’s important to understand that the intricacies of the short sale may preclude your offer from being accepted the first, second, or even third time around. If this is the case, don’t give up! Find out how you can improve the chances of your offer being accepted and make those changes for the next packet (if they’re applicable). It also may be that while you’re waiting, another offer may be submitted that’s more appealing to the lender, so that offer is accepted instead. If this happens, don’t become too discouraged with the process: it takes time to develop the right professional contacts, and to become highly effective in placing your offers. And, remember: choose your short sale wisely, or it may not sell.