How Do I Make Money With Short Sales?

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How do you make money on short sales? Here are some of the advantages and disadvantages of short sales, and how to make the most money out of them if you do decide to do them.

“I need some starter information on short sales. What is the benefit to the owner versus foreclosure? How do I get paid my commission on top of the lender taking less for the sale? How do homeowners associations get paid that are in arrears? Do I send an offer with a request for a short sale to the lender? What if there is a second on the house as well?” – Babbs Stilly from Kansas City, Missouri

Joe: First of all, let’s talk about short sales and the value of doing short sales. There are a lot of people out there who are teaching short sales as being a viable way of working as an investor. And you can make a lot of money in short sales. There’s no reason you can’t make money in it. This just came out from the National Association of Realtors: only one in nine offers that are made to lenders for short sales are accepted, so you’re in an uphill battle.
 
Joe: If you know how to do it and really understand the process, you have a chance of making it happen. But, lenders are not stupid. They’re going to try to get the most amount of money that they can from the properties, and if it makes sense for them to take the property back and list it, they’re going to do that instead.
 
Joe: So, don’t expect to get 30-60% discounts on short sales. I don’t see that happening very often. But let me answer your specific questions about short sales, because I think it’s relevant and there are still a lot of people that are doing it.
 
Joe: The benefits to the owner versus foreclosure are that it’s going to have a different impact on their credit, although not very much, because it’s still going to show up that it was given over as a deed in lieu of foreclosure – it’s not really going to keep their credit clean. Usually, if they’re going into foreclosure, the bank won’t even talk to them about doing a short sale until they’re late three months and filing a notice of default. This is an average number across the country. It varies in different places with different lenders.
 
Joe: Some lenders are waiting for a very long time before they’re filing a notice of default because they don’t want the property back right now and are just having a hard time keeping up with the foreclosures that are happening. So, is there a huge benefit to the seller? Not really. They’re not getting any money out of the deal. It would be much better for them if you took over the property subject to the existing loan, deeded you the property and you started making their payments. Hopefully, you can find them at a time before they stop making their payments.
 
Joe: This is the best group to go after. Everybody thinks they need to go after people who are in foreclosure and that they’re going to get the best deal doing that, but that’s not the case. What we’re going after are for sale by owners, people who are still making their payments and want to sell their property but who can’t sell their property because there’s not enough equity in there to hire a realtor to do it, so they try to do it themselves. They aren’t successful with it because nobody out there can get a loan to buy it from them.
 
Joe: We’re going to them saying, ‘Why don’t you just deed us the property? We’ll take it subject to the existing loan. You’ll stay on the loan. We’ll be on the deed. You’ll be responsible for the loan. We won’t give you a down payment. You make the next payment on the property and we’ll take over the property and we’ll put a tenant in there.’ That’s one of the things that I’ve been doing. I did one yesterday, and she was very, very pleased that I took it off her hands, even though she’s still on the loan and even though she’s still responsible and has to make the next payment on the property (because I want to have enough time to fill the property before I start making the payments).
 
Joe: By the way, if you don’t want to have the responsibility of making those payments until you know you have a tenant, you can set it up as a purchase agreement rather than just having them deed it to you and they can only close the deal if you find a tenant. So if you don’t really understand how to find tenants and are nervous about that and just want to make a quick flip, you can go out there and find a tenant, get them in there, make some money that way, and then you’ll have a good tenant for that property.
 
Joe: The “For Rent Method” that I’ve talked about on other videos is a different thing altogether because you’re just flipping the property – you’re not going to keep the property. You’re not going to keep the property for the long term.
 
Joe: One thing about keeping properties for the long term – that’s how you get rich. If you’re just flipping the properties, you’re going to make cash flow, and it’ll be nice cash flow – you can make excellent six figure incomes on these types of things, but you’re not going to get rich. You’re not going to do the seven figure stuff, which is where you’re going to want to be, and you’re not going to have the long term residual value unless you keep the property.
 
Joe: How do homeowners associations get paid if they’re in arrears? If you’re doing a short sale and the bank accepts a certain price, they’ll deal with the homeowners association. They’ll deal with any liens on the property. They’ll deal with any late payments. They’ll deal with the second mortgage – if there’s a second mortgage, they go and negotiate with the second mortgage holder and if the second mortgage holder won’t negotiate, then they won’t do the short sale. But a lot of times, the second will. Most of the time, what I’ve seen in short sales is that that second gets completely thrown out, so they have to have a second that is willing to do that.
 
Joe: That’s one of the reasons why these things fall apart. The lender wants to get as much money from the deal as they can, so they’re not as flexible as all the hype out there about short sales suggests. I hope that helps.