The Most Important Step in the Short Sale Process

The Most Critical Aspect of the Short Sale

By Deb McMillan © 2008

Good news. As a real estate investor, you’ve found a home in pre-foreclosure. You know the owner has missed three mortgage payments, and he now owes the bank more than he can sell his home for.

With the bank poised to begin the foreclosure process, you’re ready to step in and begin negotiating a short sale. You’re ready to convince the bank to take less on the property than is owed in order to save the homeowner’s credit, save the bank time and money in lawyer’s fees and court costs and buy yourself a property at a great price.

But before you can begin the negotiation process with the bank, you must first take the most crucial step in the short sale process. Unless you do this, any fee you negotiate with the bank is irrelevant. Do you know what I’m talking about? If not, you better keep reading.

The one step you never want to overlook is getting the property under contract with the seller.

You could do everything else right. You could determine that the house is worth the remainder of the mortgage: $85,000. Only it needs $15,000 in repairs to get it’s real value to $85,000. And you have estimates from reputable contractors to prove that the purchase price of $50,000 is indeed the as is value. (Don’t forget to leave room for your profit!)

You have done your homework so well that the bank wants to take the $50,000 and avoid the year and a half foreclosure process and expense. Now this property is on the verge of becoming yours at an amazing price.

If, however, the owner hasn’t signed a contract giving you permission to negotiate the short sale with the bank, you have no authority whatsoever. Although the owner is not current on his payments, he is still the owner of the property. As the owner, he has to authorize you to make the sale.

So how do you get the owner to sign a contract?

Simply approach him with the same numbers you would take to the bank. Show him how selling the property for less than its worth will benefit him. Show him how it will keep a foreclosure off his credit report as well as prevent him from owing back payments, legal fees, interest and penalties.

When he agrees to your deal, get him to sign a contract authorizing you to buy the property by way of a short sale. Then–and only then–do you approach the bank with your negotiation tactics.

Keep in mind that vacant houses in pre-foreclosure are tougher to deal with. Because you have to track down the owner. He may be living with a sister, a friend, a parent or any number of other options that are not easy to track.

Just remember that taking the time and making the effort to get a signed contract are well worth it. For that contract with the owner is the most critical aspect of a short sale.

Deb McMillan, OPHP, CMI, is a real estate investor and writer living in Hamilton, Ohio.  She has been investing in real estate since 1986 and buying, selling, and teaching short sale strategies since 2000.

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