7 Common Mistakes Short Sale Investors Make

Thursday, April 2nd, 2009 at 3:36 am

Very few investors actually know how to successfully negotiate a short sale. In today’s market, short sales can be a great way to generate cash and if completed properly they can be very lucrative and rewarding. Many investors make several common mistakes which can lead to frustration and nightmare. If you can indeed determine that you have a successful short sale on your hands and avoid these common mistakes you will ensure your success.

The first mistake investors make is not having a complete understanding of the concept of short sales. The lender is allowing the property to be sold for less than the amount due on the loan. This provides an alternative to the seller who is heading towards foreclosure, avoiding the credit damage. The process can take weeks and even months to finalize so patience and accuracy are vital. Be sure to send everything that is being requested with the package. Leaving bits and pieces out only draws out the process and makes the banks resistant to working with you. You will be asked to include an Authorization to Release Information. This is where the homeowner gives the lender permission to talk with you about their loan. They will also require a hardship letter that explains why the homeowner has become delinquent in their mortgage. They will also require copies of W2’s, pay stubs, and bank statements as a way of verifying income. You will need to prepare a repair cost worksheet explaining the condition of the home to the lender. The lender will also want to see comparable sales. The first mortgage holder may require a pay-off letter from the second and vice versa. These are just examples and actual requirements will vary by lender.

Before entering into a short sale deal it is imperative that you have buyers lined up. Lack of a strong buyers list will make your job much more challenging. A workable list of investors is crucial to your success, these are the people who will make you your money. You can find investors like yourself at local real estate investment clubs, from signs and classified ads, and from the section 8 office where they can provide you with a list of land lords in the area. After making some phone calls and getting to know what each individual is looking for you can categorize them based what type of properties they have in mind.

Another part of the preparation involves having an exit strategy lined up before getting tied up in short sale deal. Make certain your exit strategy is formulated before you begin. You are trying to answer the question, “How Am I Going To Get Paid?” Don’t get caught in the mind set that you have to wholesale or retail everything or that you have to lease option everything. Use the exit strategy that best suits the deal you are working on. You must also consider the amount of time required to dispose of the property. There is a direct correlation to time spent and amount of money invested. Your reward is contingent on your exit strategy.

Make sure you are not paying too much for the property. Remember, you make money when you buy, not when you sell. Paying too much for a property can steer your business off path faster than it got started. A single mistake can destroy your enterprise and unfortunately these mistakes linger long after they are made. Holding costs can lead to your ultimate collapse.

Be sure to start advertising the property to your buyers as soon as you have a contract with the lender. Failure to market immediately will have you paying lots in holding costs. Ineffective marketing and advertising results in a lack of leads and little opportunity for expansion and growth. You can find buyers from mortgage brokers, title companies, agents and attorneys. Place a classified ad in the local newspaper and put signs around the area, making sure to follow codes enforced by the county. You can also mail post cards and letters. Whatever you do, be pro-active in your advertising campaign.

Another essential aspect of the short sale process is your evaluation of the repairs that are needed. Inaccuracy in this area can lead to huge losses of profit. The price for your end buyer needs to be competitive with other homes on the market that are in good condition. If the property you are working with is not in good shape you will need to drastically reduce the price, hopefully you didn’t pay too much initially! Be sure not to exaggerate the repairs when you are completing your repair cost worksheet for the lender. They will be assigning the property to an agent who will be sent to evaluate. If their assessment differs from yours the lender will likely see that you were attempting to purchase the property for less than it should be sold for.

You must also remember that your due diligence is major part of your investment. Keep in mind that in a short sale the seller is not required by law to disclose property’s history, however, he is not allowed to misrepresent or leave out requested details. Your investigation and verification of these details is essential to your success. Be sure to note everything about the property, inside and out, so you can recall facts later down the road. Not having a handle on what the property needs can strongly affect your outcome.

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