When A Short Sale Is Profitable In Real Estate Investing

In a depressed real estate market filled with properties that are in foreclosure or heading to foreclosure, successful real estate investing must involve short sales, or negotiating with mortgage lenders to accept less than the mortgage balance to sell a property.   You should therefore know when to do a short sale to make the deal profitable. This article walks you through when you should consider doing a short sale.

Why do a short sale?  Most lenders have too much inventory they cannot get rid of.   They need to make loans, not acquire more properties. Each defaulted property in their inventory counts against how much they can lend. The more properties they have, the less they can lend, and the less profits they stand to gain.  On the other hand, a motivated seller would be better off avoiding foreclosure and bankruptcy by doing a short sale and walk away from the property.   Both the bank and motivated seller therefore prefer a short sale. 1) Where to get short sale leads The best time to do a short sale is before a property goes into foreclosure. Different states allow different time periods from the time a foreclosure notice is filed in court to foreclosure itself, typically 3 weeks to several months. In general, it takes 2 to 4 weeks to get the attention of the bank. They can stop foreclosure if your offer looks good.   If your state allows enough time, then foreclosure notices files in the court house may be a good source of leads. If your state does not give enough time for this, then you are better off pursuing regular motivated sellers who may turn out to be behind on their mortgage payments. Then you can do a short sale.  2) Which deals should you short sale?   If you can make an offer the bank cannot refuse (such as 80% to 90% of mortgage balance) to create enough equity to make a good profit, a short sale may be the way to go.

Deals with a second mortgage are excellent short sale candidates. A holder of a second mortgage may lose 100% of their investment in the event of foreclosure. They are therefore more than willing to negotiate and can take as little as 10-20% of the mortgage balance.

If you can negotiate both first and second mortgage, it is possible to create a lot of equity easily. This is because each loan will be discounted separately and you end up creating huge equity and profits for yourself.

If there is only one mortgage, the mortgage balance must be low enough to give you a profit if they discount 10-20% of the mortgage balance.

Of course lenders can discount more than this but I like to have a safety net before I can spend time on the deal.