Investing With Short Sales - Do Yourself Or Hire?

What is a short sale? A short sale occurs when you convince the lender to take a reduced amount in payment for a loan when their borrower is no longer able to make the payments. Very simply, a lender will make that decision when it is the best available option for the lender. In other words, when they will make more money by selling it to you at a discount than they will by foreclosing, taking the property, and selling it on the open market then it is the best option for them. Your job is to structure a deal and convince the lender that it is their best option.

What makes a good short sale candidate? There can be several things that will do it. 1) A house that is worth less than or equal to what is owed on the loan. 2) A house that needs major repairs that will cost so much that the house is worth less than what is owed. 3) A house with some problem that makes it unusable for most people. A bad floor plan for instance where to get from a living room to the bathroom, a person must go through a bedroom. Bottom line is that there is something about the house that you can use to convince the lender that the problems with the property make it either worth less than owed or more trouble to sell than it is worth to the bank. Also, the house cannot solve it's own problem. In other words, there is little or no equity so the lender cannot sell the property for enough money to make up the amount they are owed.

Once you have identified a good candidate, what's next? Now you have to decide if the seller is going to be on your side and participate in getting information together. The lender will typically require a great deal of information and documentation before they will consider taking a discount. They want to see that the owner really has a problem, (a hardship), that will prevent him from paying on the loan. Usually they want to see that this problem was something beyond their control rather than some guy just trying to get out of his obligations.

The lender will want documentation of the hardship as well as a complete financial statement showing that there are no other assets that could be used to pay off this loan. They will ask for at least one year of tax returns and usually two. In addition, they will want several check stubs to verify the amount of income flowing in each month. They will ask for a personal letter from the seller which lays out the hardship and how it came into being. And on, and on... Bottom line is that it will be a lot of work and if the owner is not 100% willing to provide everything you ask for, your chances of successfully getting a short sale from the lender are tremendously reduced.

You have a good candidate and a good owner. Now you call the lender and start the process. You will want to talk to the "loss mitigation department". You request a short sale package and they send that out to you. The short sale package has the lender's forms and requests all of the information that I mentioned above. You run around and collect all of the information and put together a professional looking package. You want the package to be as complete as possible so that there won't be any need to stop the process in the middle to get more information from you. Then you wait as the lender's process grinds along. At some point they will make their evaluation of what the property is worth by sending a person out to see it and you will want to attend that appointment. At some point a decision will be made and if you've done a good job and if it is in the best interest of the lender, you will get your short sale. BUT, by no means is it guaranteed. You may have spent a great deal of time and energy and still be turned down for some strange reason.

Short sales can be a lucrative part of your investing business. I think all investors should have this tool in their toolbox. The question is, do you want to do all of this for yourself or would you be better off hiring someone? That's an individual decision. My preference is to hire a company to handle it for me because of the tremendous amount of time that it can take. I think I can use that time to keep growing my business instead of trying to negotiate with a lender. Ben Pargman has put together a great group of people at The Short Sale Service. They are the pro's and they know how to talk to the lenders better than I do. There are others out there or you may prefer to do it on your own. Both ways are fine. Best of Luck!