There is a lot of talk about short sales but very few people, even real estate investors have a detailed understanding of the entire process and whether or not they should get involved.

By the time we are done here you will know everything you need to know about short sales, how to help folks in these situations and how to make the most of them for your business.

exactly is a short sale, how does the process work and what does it mean to you
as an investor?

Short sales have been
around a long time, but there is still a lot of confusion surrounding them and
how the process usually works.  As a real
estate investor you should know this process inside and out, even if you don’t “do”
them.  In this article I’ll introduce you
to the basics of short sales and you need to know, not just as an investor but
as a homeowner too.  Be brilliant and
read on friends!

According to (LINK) Wikipedia
here’s the definition of a short sale: “A sale of real estate in which the net
proceeds from selling the property will fall short of the debts secured by
liens against the property.  In this
case, if all lien holders agree to accept less than the amount owed on the
debt, a sale of the property can be accomplished.”

So what is a short

A short sale is when
the lender or bank agrees to sell a property for less than the remaining
balance left on the mortgage.  So if a
seller owes the bank $100,000, a short sale would mean the bank would accept an
offer for less than the $100,000 that the seller owes.

Why would the bank
take less than what they are owed?

Because the banks are
caring organizations that just want to help the common man.  Uh, no. 
Banks have hundreds of bean counters and accountants on staff and they
have calculated all the risks and rewards, so if they are accepting a short
sale it is because they think it is the most profitable option they have left.

In order for a home
to be a candidate for a short sale there has to be some mitigating factor,
usually the seller is behind on payments or already in foreclosure to begin
with, so the bank sees a potential short sale as saving them time and money.

Why would a seller do

Often the process is
initiated by a seller who contacted their bank in the hope that they could
avoid having a foreclosure on their record. 
I have been involved with far less transactions than others on our team
but in the thousands of deals that we have collectively done there are
basically only two reasons a seller gets behind on their payments: job loss or

So if a seller is in
a situation like that or something similar and they just want to get out, a
short sale can be a good way to make the best of their situation.  It is better than just walking away.

Short sale benefits
to the seller

For the right kind of
seller, a short sale can help in a number of ways.  It can mean they avoid having a foreclosure
on the official record, they do a lot less damage to their credit, they avoid
IRS issues, they resolve/avoid deficiency judgments, they are settled with
insurance companies and other debt collectors who would’ve come after them, they
can be legally released of liability and be able to “start fresh” without
lingering fears and concerns.

If they just go
ostrich (which too many troubled sellers do) and ignore legal notices and
warnings while judgments stack up with their head in the sand, it is likely
that they are chased and hounded for years afterwards.  A short sale is like a final nail in the
coffin, a closure of sorts, to these issues because they all get settled.

If I have two or more loans on a property
can I still do a short sale?

I only dealt with this
a few times but others on our team have seen it a bunch of times, the answer is
yes.  So if you have two mortgages on a
property you can sell and take the proceeds and do a short sale with the second
mortgage while the first is not involved at all. 

The first would be
paid off as a normal sale, while the second, third, fourth, etc. for as many
mortgages as you had, could be paid off at a discount as a short sale.

Good News to the

1.) No Foreclosure on Seller’s Credit

If you have to choose between a foreclosure and a short sale, pick a short sale every time.  Just about the only thing worse than a foreclosure on your credit report is criminal activity like high end insurance fraud.  Whether it is you or a seller you are working with you should ALWAYS pick a short sale over a foreclosure.

2.) Closure and Financial Pressures Lifted

When a seller is having a hard time with their mortgage payments, they are on an emotional roller coaster that too many investors fail to empathize with.  Be nice to these folks, extra nice.  You need to realize that getting this monkey off their back is a big relief. 

It is better that they do it officially with a short sale and liability release documents rather than disappearing and spending the next seven years looking over their shoulder hoping they don’t get tracked down.  A short sale settles everything, legally and officially.  It’s over.

Bad News to the Seller

1.) No cash or rewards (but they don’t pay fees either)

There is just about no bank in the world that will let the seller walk away with ANY cash from a short sale, this is also why the seller doesn’t have to pay listing fees (like realtor commissions) for the sale either because the bank will pay all that BUT they want to make sure the seller gets nothing.

We have a way to help
these homeowners in another way though, we have a free comic book that teaches distressed
homeowners how they can make money during this short sale or foreclosure
process.  One of our student success
stories was based on this, he made over $100,000 in six months by giving this
guide away to motivated sellers.  More on
that in another post, cool stuff.

2.) It may take forever to get answers.

Banks often move at a pace that makes the government look like the Flash.  The more under the gun the seller is, the more these delays hurt because usually the seller is still making the mortgage payment. 

That brings us to
another question that we’ve gotten about this:

Should the seller still make payments
during a short sale?

As an investor DO NOT EVER tell a seller to stop making payments, the only time this makes is if it is part of a deliberate plan of action and they are working with a lawyer, NOT an agent or investor, on their situation.

Stopping payments may
have the incentive of motivating the bank to speed up and accept the short sale,
but it also means that a foreclosure is nearly inevitable because if the seller
had a hard time with the payment to begin with then they definitely don’t have
the funds or income to make up payments.

Remember: choose a short sale over a foreclosure.

With all of your
clients, you should treat them like family and make sure they understand how
serious foreclosure really is compared to a short sale, even if that means you
don’t make any money – just help them out.

I have seen realtors,
investors and even banks encourage sellers to stop making payments and it is
terrible advice.  That’s one reason I’m
writing this, so I can help investors help sellers.

How does a home
qualify for a short sale?

A home doesn’t have
to be “underwater” (you owe more than the home is worth) like during 2008, but
there does have to some special circumstance with the situation. 

Each bank will be a
little different about this and there is no single set of legal requirements
that everybody uses, but basically the two main ingredients that are usually

A.) Not enough equity

B. )Seller’s financial hardship

Not enough equity:
This doesn’t mean that the home doesn’t have equity, it just means that they don’t have enough equity to sell.  So if a home is worth $300,000 and the seller owes $280,000 on the mortgage, then technically they have $20,000 inequity.  But the cost of the sale will usually be at least $23,000 so they would lose $3,000.

If you don’t have
enough equity to sell, then you’ve met this criteria.

Seller hardship:
This will be outlined in the letter we will talk about below, but basically this means that bank needs to see a reason WHY the seller won’t be able keep making their mortgage payments and why it would in the bank’s best interest to cut their losses and accept a short sale.

How does a short sale benefit the buyer or investor?

1.) They get a better price.

This is the number one reason that any buyer or investor is going through the short sale process.  This is more work and takes more time but the carrot is that they might get a good deal.

2.) More negotiating power.

As a buyer or an investor going into a short sale you know that you are dealing with a motivated seller that has a burden that they need relieved. You start with the upper hand, and because of the nature of short sales and the delayed process there are much fewer buyers and investors to compete with.

3.) Allows for Specialization

The only investors that I’ve ever met that make money on these deals are the ones you have built specific teams to handle everything, for them this is what they do and when your team gets good at this they can close deals regularly.

The BAD news for

1.) The process can take forever.

Banks are known to move like molasses (unless they need a bailout), so any investor or buyer needs to be ready for long delays and multiple rounds of paperwork and verification documents.  Usually it will take about three to four times longer to close a short sale versus a traditional sale.

2.) The home may need a lot of repairs.

Often these homes are sold as-is because neither the bank or the seller is going to do any work to the home.  So you get what you get and many times if an offer is accepted, or even before then, the seller may mentally check out and let the home deteriorate.

So what is the actual short sale process?

The process will vary
slightly from bank to bank but first the main thing that you need to understand
is a short sale package that needs to be submitted.  We’ll cover that package first and then go
over the exact process.

The contents and details
of this package may differ and the seller will have a realtor or attorney
involved that will help them get the exact details for their state and bank,
but here’s a general overview of what’s needed.

What is in the short
sale package?

The following items
are produced by the seller and sent to the lender.

==> Letter of authorization.
This gives your agent the authority to speak with the bank on your behalf.  This is something like a Power of Attorney but much more limited.  Banks will typically only discuss details with your realtor if they have this document signed.  Without this your realtor will be unable to negotiate the terms of the short sale.

==> An exclusive listing agreement.
This states the listing of the property (dated) with an agent/broker.  The bank will want to see when the house was listed, any other potential offers, the pricing and any pricing changes, etc. 

==> Complete financial statements.
This will include at least two bank statements.  If the seller is married or living together with somebody they should include their bank statements as well.  The bank will want to see the financial situation and hardships.

==> Seller’s ‘hardship’ letter.
I’ve seen these letters can make a big difference.  This is NOT a sob story but an explanation about what happened to the seller’s financial situation that has caused this big problem with no immediate reversal in sight.  The major issues will be job loss, divorce and/or medical bills.  Be honest with these.

==> Two years of seller’s tax returns.
These will include every page and every schedule, they will be signed and dated and include any explanation if there have been extensions or delays in filings. 

==> Two years of seller’s W2s and/or 1099s.
The bank wants to see how much income was reported to the IRS.  This will tell the bank the seller’s salary according to what the employer reported to the government.  If a 1099 is needed in the case of the self- employed then a profit and loss statement should also be included.

==> Last 60 days of pay stubs. 
The more included here the better, the bank wants to the seller’s previous financial situation as well as the current financial situation.  Sometimes people are paid weekly and they may include the last two weeks of income, but it is better to go back further to at least 60 days.  You know what the bank wants, they want to see “hardship” and a seller with nothing to hide, the more that is disclosed, the better.

==> Full Competitive Market Analysis (CMA).
The bank will eventually get a BPO (explained below) but they will want to see the comps (comparable sales) in the area of recently sold and unsold inventory in the area, how it compares to the home in question and how the realtor came to their pricing conclusions.

==> List of needed repairs and contractor estimates.
You want to list any repairs, upkeep or upgrades that would be needed to bring the home in line with others that are selling well.  Along with the needed work you’ll want to include multiple estimates from contractors so that the bank gets a good idea of the costs.  This will also be factored into the listing price and the eventual selling price.

==> The signed offer to purchase and buyer docs.
Usually a short sale will not be approved until you have an actual offer in hand.  Along with the offer you want to include the escrow info, the buyer’s proof of funds letter, earnest money, the pre-approval information and any other details the bank asks for.  Make them see how easy and fast this closing will be if it relies on the quality of the buyer.

==> Estimated Hud-1. 
The HUD-1 has been largely replaced with the Closing Disclosure and the Good Faith Estimate with the Loan Estimate but many mortgages you will be dealing with used a HUD-1 previously.  It doesn’t matter what form is used, sometimes just sending an easy to read excel document (along with a printed version) will work.  The point is that you want to make it clear what the bank should expect to make with a line by line breakdown of each cost as well as their total net.  Using an actual closing date is a good idea too.   

That’s what’s
involved with the package.

Now here’s the actual short sale process.

Step One: The Listing

The realtor lists the short sale. The seller needs pick one that knows the process and preferably knows the bank and has gone through this process with them several times.  Relationships that they have can be very helpful.

If you are helping a seller or doing consulting work with homeowners (something very profitable that we can go over in another video for you guys) then you want to help them screen and find a good realtor. They are priceless. And remember that the bank will be paying the selling fees so the realtor won’t cost the seller so they can afford to do it right and be picky.

Step Two: The Package

The seller and agent put together short sale package docs, this usually won’t be submitted until there is an offer, but at least getting the process started immediately while having the house on the market is a good way to save time.

Step Three: The Offer

The buyer makes the offer. They should know the process, the better qualified they are the less likely they will walk away from the deal because of delays.  They need to know that this process may take time and requires jumping through hoops.

This is another thing that your realtor should understand, you really need to sit down with the buyer and explain the entire situation without fear of the buyer walking away because if they are going to jumpy you want to know right now.

The last thing you want is to spend months getting the short sale approved only to have your buyer vanish. I’ve seen this happen and people will blame the buyer but you MUST see this as your fault for not setting expectations correctly. Qualify the buyer well and you’ll save yourself from headaches later.

Step Four: The Delivery

The agent sends the package along with accepted offer to the bank.  Now all the info from the short sale package is put together with the buyer’s info and offer is sent to the bank.

Step Five: The Review

The bank reviews the offer and the short sale package and takes their sweet ass time with it usually, then roughly an eternity later they may (possibly) accept the short sale. It is during this time that nearly all these deals fall apart, during the waiting time period.

That’s why the realtor should be on top of this and calling, visiting and checking up on this regularly.  During this time the bank may ask for more info, as soon as a request for info is made you want to have it turned in within 24 hours at the latest.  It is only the selling agent that will be able to follow up and get answers, not the buyer or his realtor, this is why a good realtor can go a long way during this time.

The lender will
acknowledge they got the package and that it is complete, this may take a few
days or a month or longer.  Then a
negotiator or agent will be assigned.  They
will most likely order a Broker’s Price Opinion (BPO) from a realtor/broker of
their choosing.  This is basically a CMA
to verify the values, numbers and comps submitted.  This could take a few days or a month or

There may be other
docs the bank wants signed in case they are selling or have sold the loan, disclosure
requirements, mortgage fraud protection, etc. 
Again this could take days or months.

Step Six: The Approval

The short sale is approved and the realtor receives notice. If all goes well the short sale is approved and ready to close.  Ideally you get an approval that is NOT buyer specific, because if this buyer disappeared (quite possible depending on how long the process took) then you want to be able to quickly find another buyer who can fulfill the offer.  However, if the short sale was approved for a specific buyer and you introduce another buyer, it is possible that the entire process will be started all over again. Banks be crazy.

Step Seven: The Closing

The sale can now be completed.  Once all the above steps get done, you schedule a date with a buyer and close the deal.

So that’s it, that’s the process.

We went over what a short sale is, why it makes sense for the bank, the seller and the buyer, and then the entire short sale process including the package that needs to be submitted to your bank.

Here are a few sites where you can get lists of short sale or at least foreclosed properties for free but by registering:

This is a site where you can find realtors and agents that specialize in short sales:

Here is an article from that explains the difference between a foreclosure or a short sale:

And of course wikipedia has some good info on this too:

The Bottom Line:

You should know about short sales so that you can help sellers with them but this is NOT an area I, or any of us, recommend getting into – especially if you are just starting out.  So look at short sales and say like Big Sean:

I don’t fu** which you.

Instead focus on getting your first model going, your first $10,000 – $30,000 a month with NO loans, no banks, no money down, etc.  Go through our free stuff and please make sure to thumbs up the video and comment if I can answer a question for you.

Any questions or comments please leave them below.


~ Indy Anna

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