Preforeclosure Real Estate Short Sales 101

Know Your Three R’s!

By Deb McMillan © 2008

There is no doubt that success can be found in short sales – buying real estate before the foreclosure auction and getting deep discounts on the purchase price. However, you have to do your homework before becoming involved in a purchase.

I have been investing in real estate for over twenty years now, and since 2000, I have focused almost entirely on short sales. I can attest to the fact that there is money to be made from these houses. Nevertheless, there is work to be done before the deal is closed.

It is no secret that to succeed in any type of business, you must internalize “the basics.” The world of short sales is no exception, and it has its own version of the three R’s: You must Reach out, Research, and be Ready to Negotiate.

A short sale can occur when a homeowner is behind in payments, typically by about three months. He or she then faces the obvious problems of potential foreclosure, the bank taking back the house, and destroyed credit.

In addition, the bank that holds the mortgage is losing money, pouring additional financial resources into lawyers and court fees. As the investor, this is where you come in.

Reach out

Your first step is to reach out to the homeowner. Contact the seller and present the idea of a short sale to him. Most likely, if he has tried other options such as listing the home with a realtor or FSBO (For Sale By Owner) and it didn’t sell, he will be happy to become involved in such a deal. Especially when he learns there is almost always NO cash out of his pocket.

Aside from making an intelligent investment for yourself, you offer a solution to someone whose problem may seem unsolvable.

Upon gaining permission from the homeowner, you then negotiate with the bank to take less on that mortgage than is actually owed and consider it payment in full. This is where the second “R,” research, comes in.

Research

Of course the first step in your research is to ascertain the remaining mortgage balance, but two other facts are equally important. You need to ask: What is the potential value of the home after any necessary repairs are made?

To answer this question, you need to discover the selling prices of similar homes on the market in that neighborhood. If the home is potentially worth the same or less than the mortgage balance, it is a good candidate for a short sale.

Your research is not done yet. You need to discover how much it will cost in repairs to reach that potential value. For example, a homeowner facing foreclosure has a mortgage balance of $80,000. After researching comparable sales, you discover that the home is worth about $70,000. That being said, to actually get to that $70,000 value it needs $10,000 of work.

With this information in hand, you are ready to call the banker and offer her $35,000 for the house. But the number itself is not enough. You need to present factual data with your purchase price, and you need to prepare for the third and final “R:” readiness to negotiate.

Readiness to Negotiate

It takes a little convincing to get the bank to agree upon that reduced price. Call the bank armed with data. Present fact sheets with comparable sales. Present pictures that validate necessary repairs and contractors estimates of the cost.

Remind them that the house will never sell for the amount that is owed especially when there are repairs involved, structural damage, or crime in the area. Furthermore, the longer it sits the more vulnerable it becomes to vandalism and destruction that will reduce the final price even more.

Eventually, the unsold home becomes a liability to the bank as opposed to the asset they believed it to be when they loaned money for it. Tell the bank you will bring cash and close quickly. They know that cash now is better than the same amount of cash later.

As an investor, you can make the problem go away for both parties.
In the end, everybody wins. How often can you say that about business deals?

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