Short Sale Investing Part 1: The Life Cycle of a Short Sale
Hey there, Cody here…
Today I’m going to share with you Part 1 of a great 2 Part series, The Life Cycle of a Short Sale. In Part 1, we’re going to cover what short sales are, why you should do these deals, the life cycle of a short sale, and where you should get leads.
So, let’s dive right into it…
What is a Short Sale?
- When a homeowner owes more money on their property than it’s worth and is trying to sell.
- When an investor negotiates with the homeowner's lender to purchase the property at a discount, then resells the property for a profit.
Basically, a short sale is when a homeowner that is currently behind on their mortgage needs to sell for some pressing financial reason. In other words, they cannot afford their mortgage due to a hardship, or perhaps they are being relocated and can’t afford two houses.
How are Short Sales Beneficial?
Short sales help…
- Banks mitigate loses;
- Neighborhoods keep their market value;
- Homeowners get out of stressful financial situations; and
- Investors make money by helping others
The Life Cycle of a Short Sale
As an investor, you can help the homeowner navigate through the short sale process and negotiate on their behalf in order to purchase the property at a discount – sometimes a huge discount. Then, you can either place the property into your rental portfolio or collect the cash flow or flip the property for a nice chunk of quick cash.
Here’s a fancy little graph we put together for all you visual learners…
In the beginning, you're probably going to be a one-man (or woman) show. You might be both the buyer of the property and the negotiator. This is great until you have mastered the process and build up your pipeline of deals, but eventually you're going to want to separate all the parties of the transaction and end up just being the puppet (with some nice cash in hand).
Your ultimate goal should be to have a real estate agent and an experienced negotiator working for the homeowner and then you would simply bring in the new leads. When I say piles of cash, I'm not kidding. Now, we all invest for different reasons. Maybe you want to go on nice vacations or build some killer backyard with fire pits and water features… Maybe you want to drive nice cars or maybe you just want a bunch of cash so you can feel secure.
In order to be able to do those things, let's dig in and begin learning what the short sale process looks like…
Short Sale, Big Cash
As a new lead comes in, you first want to verify that the homeowner has no equity in a spacing of verifiable hardship that is forcing them to sell. If they pass this snip test, then you're going to go ahead and send them out a short sale informational package.
This package has a checklist of all the items the homeowner will need to gather in order for you to build a short sale packet that you will eventually submit to the lender (or lenders if they have more than one loan).
It also has all of your disclosures in it protecting you and letting the homeowners know that you're not a charity and that you plan on making a profit. Once you get the paperwork back, you're going to go ahead and verify that the packet is complete and add all of your supporting documentation.
This can be comparable sales information or even the number of sex offenders living in the neighborhood. You’re going to want to include in your initial package anything that can help devalue the property.
Then, make an offer to purchase and submit all of your paperwork to the homeowner’s lender or lenders and verify receipt. Now, I can't tell you how many times I submitted paperwork only to find out later that they never got it or claimed they lost it. So, it's definitely a good idea to verify receipt. Next, get a BPO (otherwise known as a Broker's Price Opinion) ordered and get a negotiator assigned to your case.
The BPO is an important step that you definitely want to prepare for. Basically, this is where the bank will send out a representative to give an opinion of value. In most cases, this is just a real estate agent that gets paid around $50 bucks, so you can imagine that they have very little motivation to do any more work than absolutely necessary.
Also, in many cases, the same agent will become the REO listing agent if the home ends up going through foreclosure and back to the bank. If you think about that for a second, this is exactly how they get their inventory so subliminally, they don't want the short sale to go through.
You don't want them to overvalue the property because it will end up killing the short sale deal. Get prepared with real evidence of comparable sales in the area and meet this person out there to offer some help.
Now, I wouldn't go as far as saying, "Go out there and try to influence the BPO," but definitely give them any supporting documentation that's going to help make their job easier and get the number you are looking for.
Once you get a negotiator assigned, negotiate with the lender until you get a short sale approval letter. In many cases, if there are more than one lien on the property, you may end up with a standoff. This is where the second lender won't do anything until the first lender does something and the first lender won't do anything until the second lender does. Catch 22 - super frustrating.
You're going to have to push through it and get the deal done. Once you get that short sale approval letter from all the different lien holders, review them with the homeowner and make sure there is a complete release of debt.
Some lenders are sneaky…
They try to put in language that says that at some point in the future they’ll try to collect the money from the old homeowner that they lost.
A completed short sale should release the homeowner of any future liabilities or at least be approved by the homeowner in writing that they understand that they may be liable in the future and that they're okay with that.
Lastly, all you need to do is go get your funding together and close the transaction with a title company or qualified real estate attorney. Then, go pick up your check and enjoy the feeling of short sales. Well done!
Where can you Generate Short Sale Leads?
The majority of my success has been because I have mastered generating online leads.
I think as a new investor, it’s key to learning cutting-edge strategies that bring in new business. The great thing about online marketing is it just keeps working long after you stop putting it out there. I have old blog posts from 2006 and 2007 that still drive homeowners in distress to my pipeline.
The first thing I highly recommend is getting a website blog or squeeze page up. This will act as a central hub that all of your other online marketing will support. I have blogs and squeeze pages, but my main short sale website is codysperber.com and all of my other forms of online marketing drive traffic to it.
Lately, I've had a tremendous amount of success doing Facebook pay-per-click advertising and it was easy to set up. I think I set my daily marketing budget at around $20 and I was generating one to three qualified leads per day. If you think about that math, I could build a short sale pipeline at 20 deals within two weeks.
I have also successfully used some offline methods to generate leads. I get most of these leads by networking with local real estate agents who have clients that need short sales but their agent doesn’t want to deal with lenders. As an investor, I partner with the real estate agents and let them to keep their commissions if I'm able to buy the loan at a significant discount.
If I don't end up getting that good of a deal, we end up just splitting the commissions. This is a win/win for both of us, and many of the agents now bring deals to me on a consistent basis.
To be Continued…
That’s it for now. Stay tuned for part 2 where we’ll cover short sale challenges, lender negotiation how to properly handle (crazy) loss mitigation.
Any questions so far? Y’all have any short sale success stories to share with us? I’d love to hear from you in the comments section below.