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Real Estate Short Sales : Foreclosure Investing For Pennies

   By: Jarad Severe

Short sales are becoming more and more popular as more and more investors learn this creative technique which can create huge profits.

A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from a seller, you are purchasing the property directly from the lender for a discount. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000. You write an offer to the lender for $220,000, which is accepted as full payment for the loan. This is a short sale. Why are they willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.

Foreclosures are spreading all over the country, which means there are opportunities everywhere. Lenders are being overwhelmed with properties they inherit because of bad loans. It is safe to say that most lenders will accept a short sale, however, you may come across one or two who will not discount. If the numbers work out for the lender they will do it.

It is best to do a short sale when the property is in the pre-foreclosure state. Yes, you can perform a short sale when the bank owns the property, however your profits will more than likely be smaller. There are two stages within pre- foreclosure. The first stage being those individuals who are behind on payments and the second stage are those who are behind on payments with a notice of default. In order for this to work properly and for you to successfully get a short sale, you must find the homeowners who are in the second stage of pre-foreclosure or more than 3 payments behind on their mortgage. Once the notice of default has been recorded, banks become motivated as well, so you are more likely to get a discount. Until that time, very rarely will a bank ever discount a mortgage that soon. Why would they? The homeowners still have time to cure the loan and make up the back payments.

It does not matter what type of house or condition it's in, all mortgages can be discounted. Because of this, short sales are one of the most effective techniques for discounting loans in real estate. Short sales create huge investment opportunities and are a must if you want to be competitive in this market.

One of the most important steps in the short sale process is getting the deed. Too many times, beginning investors will skip this vital step. Why do we want to get the deed from the homeowner(s)? Because all too often, homeowners change their minds, or want to back out of deals because they are scared, or they want to re-negotiate. Without the deed, they can back out of the potential short sale even after you have spent hours working on their property. When the homeowner signs the deed over to you, now you control the property (subject to) and you can go to work by calling the bank.

There is a certain process for calling the bank when you're doing short sales. Banks can usually tell if you've never done this before. When you call the bank, you never want to tell them you are an investor. This one of the biggest mistakes rookies make and sometimes will result in the lender not accepting a short sale. Therefore, when you call the lender to request the short sales packet, you want to tell them you either represent the homeowner or you are the buyer. Sometimes they may ask if you are an attorney. Again, just tell them who you are - do not use "investor". Then you'll want to request the "short sales packet" or "workout packet". When the packet arrives it will explain exactly what you need to make this short sales deal successful.

The lender will usually request a hardship letter, a HUD-1, and a financial statement from the homeowner. A hardship letter is telling the lender why the homeowners are not making their mortgage payments. Sometimes they will request bank statements, pay stubs, income statements, and so on. Be prepared to send them everything they ask for because if you don't, your short sale will not be accepted. Do not waste any time! Send everything the lender asks for back ASAP. It usually takes at least 3 weeks or more to get an answer back from the lender, so you can't afford to wait. If the auction is approaching, you can ask to extend or postpone the auction which in most cases they will, if they know it is a legitimate offer.

Next in the short sales process is the BPO. This stands for Brokers Price Opinion. This is by far one of the most important steps in the whole process. Basically a real estate agent will come out and give their opinion on what the house is worth. The key to short sales is the BPO. You want to try everything you can to influence the BPO to come in as low as you can. The lower the better. You can influence the BPO by creating a list of (low) comps in the area, a list of repairs, and showing up at the property to point out every little item that needs replaced. When the BPO comes in low, the banks will usually accept your offer.

Copyright 2005, Foreclosures and Flippers Inc. - All Rights Reserved.

Jarad Severe is a leading authority and expert in Foreclosures. He is President and CEO of Foreclosures and Flippers Inc. Jarad can be reached by email at: or you can visit his website at: to receive more information on foreclosures, short sales and more.

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