One of the most effective foreclosure strategies, a short sale is when a lender accepts a payoff of less than the amount owed to avoid a foreclosure, or, if the foreclosure has already occurred, to unload the property and avoid greater losses. Using the example of Joe and Mary, consider that if they tried to sell through a traditional real estate agent, they’d have to come up with cash at closing to pay the broker’s commission and complete the deal. Using a short sale strategy, you can go to the lender and offer $170,000 as payment in full for the property.

If the lender accepts, everybody wins. Joe and Mary have avoided foreclosure and gotten rid of a huge burden. The lender has avoided the cost of the foreclosure, the damage of having a bad loan on its books, and the trouble of having to take possession of and then sell the property. And you have purchased a property with an automatic $60,000 in equity.

While it’s possible to do a short sale after the foreclosure when the bank actually owns the property, it’s best to use this strategy when the homeowner has received a notice of default but before the actual foreclosure. Lenders will rarely, if never, negotiate a short sale until the notice of default has been recorded. But at that point, the lender can be very motivated to give you a handsome discount to take a problem off its hands.

Properties that are over-leveraged (with mortgages exceeding the market value) and properties with multiple mortgages are prime candidates for short sales. Remember, second and third mortgages are typically wiped out at a foreclosure auction. Those lenders would rather have something than nothing and will usually be willing to negotiate with you. Of course, cosmetically distressed properties are also ripe for a short sale because lenders don’t want to get in the fix-up business.

How to do a short sale

The first step in the short sale process is to reach an agreement in writing with the homeowner. Check with a real estate attorney to determine exactly what documents you need in your state to move forward with the process.
Next, contact the lender and ask for the short sale or workout packet, which will probably be just a page or two of instructions that will tell you exactly what you need to do to make a short sale offer to that particular lender. While the information lenders request is similar, details and presentation format will likely vary. It’s important to follow the lender’s instructions precisely.

The lender will probably request a substantial amount of information on the homeowner, including a letter explaining why he has not been making his mortgage payments, bank statements, pay stubs, a copy of the real estate purchase and sale agreement, etc. Put this information together and return it to the lender as quickly as possible. Remember, the foreclosure clock is ticking.

The next step in the process is the broker price opinion, or BPO. This is an alternative to a full appraisal and is typically conducted by a local licensed real estate professional. The BPO is the secret to a successful short sale—and you want it as low as possible. Remember that real estate agents are conditioned to go for the highest appraisal possible, but you need for them to see the situation through your perspective. Never ask the person doing the BPO to do anything illegal or unethical, but let them know that you are working on a short sale and help them see the lower side of the market conditions that you want to present to the lender. The lower the BPO, the better your chances of getting the discount you want.

After the BPO is turned in, the lender will either reject or accept your short sale offer. If it’s rejected, you can renegotiate and even request a second BPO. If it’s accepted, congratulations—you’ve solved a problem for the homeowner and the lender, and made money for yourself in the process.

By Jordan Taylor