Short Sale Real Estate – When to Make a Deal
I usually advise avoiding short sale real estate investing deals unless you have extensive experience and a sound knowledge of the subject.
However, there are specific circumstances that can result in a nice profit in a short sale deal. In this article I will cover a scenario where I will consider a short sale investment, which is when there is a big second mortgage on the home.
What is a Short Sale in Real Estate?
A short sale is when a homeowner has negative equity in their home and has defaulted on the payments. In other words, they owe more on their loan than the home is worth. When this happens, a lender might take a payment “short” of what the homeowner owes to close out the loan, even at a loss.
There are many drawbacks to investing in short sale deals.
- It is very difficult to get the bank to agree to the terms of a short sale. It can take months just to get an approval. This means you can put in months of work only to have them decline your offer.
- The seller also has to approve the offer. If they have an emotional attachment, this can be difficult.
A short sale home is sold as-is. This is fine when you buy an investment, but it is essential to complete an inspection to make sure there are no major flaws.
When to Consider a Short Sale Deal
The main factor? A big second loan.
Let’s look at an example. Say you have a home with two loans, each for $60,000. That is a total of $120,000. But the home is only worth $100,000. If you were able to short sale the second $60,000 loan down to $10,000 you could then keep the first loan in place with the first lender and take over the payments using a subject-to-deal.
The second lender would be more likely to accept $10,000 because they know this is more they would get if the house goes to auction, because most of the money would go to pay off the first mortgage.
You just bought a house at a great discount! Deals where you have a large second loan can be very lucrative, but it takes a lot of knowledge to complete successfully.
The Bottom Line
I would stay away from short sales unless there is a large second loan. Even then, it is only something you should attempt if you have a lot of real estate investing experience. If you want to learn more about short sales, and the methods I use to create millionaire real estate investors I invite you to download my Unlimited Funding Kit.