Are Short Sale Deals Profitable for Real Estate Investors?
Investing in short sales can be a powerful real estate investing strategy, but it isn’t without downfalls. I have very specific criteria that I use to decide whether or not a short sale investment makes sense, and only if it meets these conditions do I suggest dealing with short sales.
The Cons Of Short Sale Investing Are:
- It is hard to negotiate a deal with most lenders because they have very specific criteria.
- The process of a short sale can take four to six months, maybe even longer.
- Once the short sale is approved, you have to pay it off in full within a certain deadline.
- To pay off in full, you will need money, which means you either need a hefty amount of cash laying around, or you will need to get financing.
I like to teach my students that it is possible to invest in real estate without using your own money or credit, and so a short sale deal, as described above, does not fit those criteria.
However, there are situations where it can make sense to invest in a short sale deal. It is important to know what to look for, and while many deals may not meet these criteria, when they do it can be a great money-maker investment.
When Does it Make Sense?
The only time it makes sense to do a short sale is when the seller has a second (or third and fourth) mortgage on their property, AND there is equity in the primary mortgage. You would be surprised how often this does happen, especially when a homeowner is in distress and defaulting on their payments. We do not want to short sale the first mortgage for the reasons explained above. To be able to pay off the amount of a short sale of the first mortgage would likely require a large amount of money amount, and will take cash or funding to pay it off.
So, if a home has additional mortgages, you can short sale the second, or third, or fourth, mortgage at a great discount. You then pay to reinstate the first mortgage, take over the payments, and then you own the house at a significant discount.
There are a few main things to look for that would point to being able to complete this type of transaction:
- The homeowner has payments in default. If they have been making payments on time, the lender will probably not be willing to negotiate a short sale.
- The balance of the first mortgage is at 80 percent of fair market value (FMV) when taking into account the money required to reinstate the loan and money needed to make any repairs.
- There are multiple loans on the property.
To learn more about the short sale strategies I have developed in my years of successful real estate investing you can start by learning about our Unlimited Funding Kit.