What Is a Short Sale? No Equity = Big Bucks

Anyone investing in real estate foreclosures and distressed properties has come across one major problem–finding deals with equity! There are so many foreclosures out there. Unfortunately, most of the homeowners owe what their property is worth.

We find that most real estate investors walk away from deals with no equity. Either, they don’t know what to do with a no-equity deal or they are unwilling to put forth the effort necessary to make the deal work. In situations like this, we discount the mortgage.

“What is discounting?” you ask. Also known as a “short sale,” discounting a mortgage means getting the bank to accept less than is what is owed as payment in full. Here are several steps that will ensure your success when discounting mortgages.

How it works

First of all, you must have the homeowner under control. Many investors are under the misconception that they can buy the property directly from the bank while it is in the foreclosure process.

Not true! The bank does not own the property until the moment of the courthouse sale.

You can buy the mortgage and finish the foreclosure process, but you cannot buy the property. You’ll have to work hand-in-hand with the homeowner if you plan to discount mortgages.

Here is how it works: A homeowner calls and tells you he is in foreclosure; he owes $95,000 on his property; the house is worth $100,000; and he’s eight months in arrears. He wants to move on with his life, but he can’t sell his house because he owes what it’s worth.

Here’s where you come to the rescue. You meet with the homeowner and have him sign:

  • An “Authorization to Release” form (this gives the bank permission to speak with you about the account)

  • A sales contract for the amount you are willing to pay for his property. In this scenario, we are going to offer $50,000

Next, you call the bank and ask for the Loss Mitigation Department. This is the department that handles properties in foreclosure.

Tell the person handling the account that you are trying to help Mr. Smith with his foreclosure, and you are willing to buy the property from him. However, due to it’s poor condition, you are only willing to pay $50,000 as payment in full.

Fax the sales contract for $50,000; comps in the area; an extensive list of repairs that are needed to bring the property up to marketable condition; a net sheet (a title company will help you with this); and some really bad pictures.

The bank will then review the information and make a decision. Let’s say they counter at $65,000. You counter again at $55,000. They accept. It’s that simple!

We discount many, many mortgages every year. Banks are not in the business of owning properties. They would rather discount a mortgage than go to the courthouse steps.

An incredible deal

We’d like to share an incredible deal one of our graduates put together. Cathi Dubois was helping some friends find a home in which they would live. They came across a property valued at $200,000 in a distress situation.

The property had a mortgage of approximately $197,000 and was in need of several thousand dollars of repairs.

Since the current owner owed what the property was worth, Cathi did what any prudent investor would do: She discounted the mortgage. She contacted the bank and began the process. Her first offer was $50,000. The bank laughed and told her to make a higher offer.

After several phone calls, the bank agreed to accept $130,000 as payment in full. That is a $67,000 discount! With the new payoff of $130,000, she then flipped the property to her friends for $140,000 and made a smooth $10,000 in less than a week.

A win/win solution

This is a typical case where having a firm grasp on creative real estate investing enabled Cathi to turn a “nothing deal” into a “something deal” just by picking up the phone. She made money (and a lot of it) on a deal most investors would have passed by.

The bank was happy with the discount, Cathi made $10,000, and her friends bought a home with $60,000 equity!

So, the next time you get a call from a distressed homeowner with no equity, what will you do? Walk away or make a few simple calls and turn your time into cash?

We certainly hope you will make the small effort it takes to do a few short sales. It’s such an easy way to make money in an industry where great deals are tough to come by.

With short sales, not only are you helping yourself; you are helping distressed homeowners and giving them the chance to start over. You can’t go wrong!

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By CREOnline Contributor

A content contributor to the original CREOnline.com.