Anyone actively investing in foreclosed and distressed properties has no doubt come across one major problem. Finding deals with equity! Trust us, this is a nationwide problem.
There are so many foreclosures out there; unfortunately most of the homeowners owe what their property is worth. We find that most investors walk away from deals with no equity. They either dont know what to do with a no-equity deal or they are unwilling to put forth the effort necessary to make the deal work. In situations like this, we SHORT SALE the mortgage. What is a short sale? You ask. To short sale a mortgage means getting the bank to accept less than is what is owed as payment in full. There are several steps that will ensure your success when short selling mortgages.
First of all, you must have the homeowner under control. Many investors are under the misconception that they can buy the property directly from the bank while it is in the foreclosure process. Not true! The bank does not own the property until the moment of the courthouse sale. You can buy the mortgage and finish the foreclosure process, but you cannot buy the property. Youll have to work hand-in-hand with the homeowner if you plan to short sale mortgages.
Here is how it works: A homeowner calls you and tells you he or she is in foreclosure; owes $350,000 on his property; its worth $290,000 and he is 3 months in arrears. He wants to move on with his life but cant sell his house because he owes what it is worth. Here is where you come to the rescue. You meet with the homeowner and have him sign an Authorization to Release form (this gives the bank permission to speak with you about the account) and a sales contract for the amount you are willing to pay for his property. In this scenario we are going to offer $190,000.
Next, you call the bank and ask for the Loss Mitigation Department. This is the department that handles properties that are in foreclosure. Tell the person handling the account that you are trying to help Mr. Smith with his foreclosure and you are willing to buy the property from him. However, due to its poor condition you are only willing to pay $190,000 as payment in full. Fax the sales contract for $190,000; comps in the area; an extensive list of repairs that are needed to bring the property up to marketable condition; a net sheet (a title company will help you with this); and some really bad pictures. The bank will then review the information and make a decision. Lets say they counter at $230,000; you counter again at $200,000; they accept! Its that simple! We short sale many, many mortgages every year. Banks are not in the business of owning properties. They would rather short sale a mortgage than go to the courthouse steps.
I like to share an incredible deal which I recently came across in Arizona, the reason I share this particular deal vs. the dozens of others I do per month, is because this was the fastest short sale and flip I have ever done. I came across a property valued at $200,000 in a distress situation. The property had a mortgage of approximately $238,000 and was in need of several thousand dollars of repairs. Based on the fact that the current owner owed more than what the property was worth I did what any prudent investor would do, I immediately started a short sale proposal. I contacted the bank and began the process. My first offer was $120,000. The bank laughed and told me to make a higher offer. After several phone calls, the bank agreed to accept $135,000 as payment in full. That is a $103,000 short sale! I Agreed and then wholesaled the property to another investor for $168,000 and made a smooth $33,000 in less than 8 weeks!!!
This is a typical case where having a firm grasp on creative real estate enabled me to turn a nothing deal into a something deal just by picking up the phone. I made money (and a lot of it) on a deal most investors would have passed by. The bank was happy with the short sale,
So the next time you get a call from a distressed homeowner with no equity, what will you do? Walk away or make a few simple calls and turn your time into cash? I certainly hope you will make the small effort it takes to short sale the mortgage. It is such an easy way to make money in an industry where great deals are tough to come by. When you short sale a mortgage, not only are you helping yourself; you are helping a very distressed homeowner and giving them the chance to start over. One can never go wrong when win/win is the solution.
Rick Sarouk is an active nationwide real estate investor and certified appraiser. He has been investing in foreclosure and preforeclosure real estate for the past 18 years. Visit http://www.RealEstateInvestorsLife.com for more investor resources.
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