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January 25, 2008 12:59 PM

Its likely that you will come across many properties in preforeclosure that have little to no equity in short sale investing. In other words, the seller owes as much or more than the property is worth on their mortgage. In these types of situations, lenders will sometimes sell you the property for less than the full amount of the homeowners mortgage in a short pay or short sale .

Short sale investing is a great way to build up your portfolio of properties or make a quick profit on resale of cheap properties. It can be a confusing process to muddle through your first few times. Once you learn the basics of real estate short sales youll find that taking advantage of these preforeclosures is a great way to make money in real estate investing. All you need are a few short sales tips.

Contacting the Homeowner and the Bank

The process of short sales begins with contacting the defaulted homeowner. During initial discussions youll verify the value of the property, find out how much the homeowner still owes on their mortgage, the name of the bank that is the homeowners lender and other information that is necessary to begin negotiations.

Once you have the foreclosure information from the homeowner youll call the banks loss mitigation department to contact a bank officer with the authority to negotiate a short sale with you. Most likely, every lender you deal with will have a different name for this department, so expect to have to do some discussing and perhaps be passed around a bit when you first call. As you make more deals in short sale investing youll end up working with the same banks repeatedly, so youll already know the person to work with on a deal.

Information Needed for a Short Sale Proposal

When you make contact with the bank officer concerning a short sale. He or she will let you know the information theyll need from you in order to consider a deal. There is a lot of paper work and due diligence involved in making a short sale offer to the bank. However, you benefit greatly in picking up this discounted property and selling it for a profit at market price.

Specifically, the lender will want to know what the property is worth. The bank will hire a local real estate broker or appraiser to evaluate the property so the bank knows its true market value. If the property is neglected or in an economically depressed area, its true market value may be less than the value of the mortgage on that property.

As a part of your short sales investing packet you will also submit your own appraisal or similar sales information. Give the lender as much specific negative information about the property as you can. In addition, include some information about the neighborhood and the local economy to help justify your discounted offer. Some sources you can use for this type of information would be local newspaper articles discussing these types of subjects. If the property has damage, or is neglected as is often the case with pre foreclosure properties, you should also get estimates for repair from a contractor. Deduct the highest estimated costs of those repairs from your offer.

In addition, the lender will ask you about the homeowners financial status. The homeowner has to prove that s/he is insolvent and cannot afford payments. If the homeowner has experienced real financial hardship and has no financial means to repay the loan, the bank is more likely to negotiate a short sale with you.

This type of documentation may involve even more paperwork than an original mortgage application will. In addition, the borrower should submit a hardship letter, which basically details just how much financial trouble the borrower is experiencing. Although you should not lie, paint the most negative picture you can while still being completely honest.

Short Sale Investing is Good for the Bank

A preforeclosure sale can be advantageous to the bank, because a short sale saves the lender many of the costs associated with foreclosing. The investor usually becomes responsible for paying all of the closing costs on the property, as well as paying for the property. These types of costs can include attorneys fees, borrower bankruptcy delays, borrower eviction, property damage, other costs associated with getting the property ready for sale, sales fees, and so on.

In addition, the banks usually have to hold enough money in reserve to cover that mortgage should it foreclose. As long as the property is in preforeclosure the bank cant use that money. This is what makes investing in foreclosures so profitable.

Contracts and Agreements

When the bank accepts your final best offer on a short sale deal the bank officer will most likely want to see all written contracts between you and the seller. This is to show you arent giving the homeowner any cash from your deal. The bank may also have you sign an affidavit attesting that you wont be giving the homeowner any money for their part in the short sale deal.

The purchase contract that you will sign with the bank will include a section stating that youll pay all costs associated with this transaction, and that the net cash to the homeowner is the exact amount of the short sale amount you pay to the bank. So, the homeowner doesnt walk away from the sale of their home with any money.

A preliminary HUD-1 settlement statement may also be requested before the short sale closes. The HUD-1 is a form used to itemize all charges and fees that the homeowner and the bank pay related to the property sale. Title and escrow companies will rarely provide one in advance of the closing. However, you can prepare your own and write preliminary at the top.

You should not be surprised or disappointed if your short sale bid is rejected at first. If the property isnt in need of substantial repairs or if the homeowner isnt truly in financial hardship, the bank may reject a largely discounted offer. In short sale investing its important to pay close attention to the numbers, since youre asking the lender to approve a sale price on a property that is much less than its appraised value.

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