Home > Blog > How Does a Short Sale Work

How Does a Short Sale Work

Posted on April 30, 2013

Many investors will only focus on deals that have a certain percentage of equity in them, usually at least 30% depending on the value of the property. However, if you want to be a complete solution provider to a distressed homeowner, you don't want to turn away any properties. You want your business to be respectable and credible. Therefore, you should have an answer for any situations. Today you are looking at countless foreclosures all over the country. The reason many of these people do nothing about the upcoming foreclosure is that they do not even have enough equity to sell their house. They would end up having to put out money to cover closing costs and realtor fees. The homeowner probably doesn't have any extra money, considering many are also behind on numerous payments.

The homeowner could try to sell it as a FSBO (For Sale By Owner), but then they do not get the exposure from being on the MLS. Likewise, any buyer's real estate agent will not even show them FSBO properties because a commission is not guaranteed to them. It is not likely that a buyer will pay a commission out of pocket to the broker. Majority of the time, the commission comes out of the seller's proceeds. Plus, a house is not likely to sell that has not been recently updated to the standards of new developments. How much money would the owner have to come out of pocket to fix up the property to market value? Obviously, these homeowners will be searching for another way out to avoid the dreaded foreclosure mark on their credit.

Turns out the banks aren't too thrilled about foreclosures either. They end up getting stuck with several properties with defaulted loans that may not be in great condition or are in a depreciating area. Here is where the investor comes in willing to short sale the property, meaning that they will negotiate with the bank to accept less than what is owed on the property. Short sales are a long drawn out process, which is why many investors don't consider it. Nonetheless, if you are having trouble finding deals with equity, creating a short sale can be a very profitable deal and a win-win-win situation for the owner, investor, and the bank.

When you agree on a short sale with an owner, you will need them to sign an Authorization to Release form giving the bank permission to speak with you about the loan. Next you will need to call the Loss Mitigation Department at the bank. Here is where your people skills come to play. If the person you talk to likes you and your story, they may settle on a great price for you. Read this next article on how to deal with the Loss Mitigation Department.

Using Loss Mitigation for a Real Estate Short Sale by Dwan Bent-Twyford

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