The House Flipper's Guide to Great Short-Sale Deals
Finding a flip that is a good deal is hard. The biggest reason for the difficulty is the intense competition -- particularly in markets that are hot, as many are today. I have tried hundreds of strategies to find and secure good deals for a flip including cold calling, making a bazillion offers, voodoo, praying and other superstitious antics.
The best strategy by far has been creating a pipeline of short-sale deals.
There are still plenty of short-sale deals to be had out there, even though prices are rising in many areas. A short sale is a type of real estate sale where the seller/owner of the house sells for an amount that is less than the amount of their loan.
How a short sale works
For example, let's say you bought a house for $100k. If you got a traditional mortgage you would put something like 20% down, or in this case $20k. The other 80% or $80k needs to come from somewhere. The answer is that it will come in the form of a loan from a bank. If you sold your house for $100k, the next day you would (less fees, commissions, etc.) get $20k back, and the bank would get their $80k. However, if you sold your house for anything less than the $80k that you owe the bank, then it would be a short sale deal, and you would need the bank's approval to go through with the sale.
In the years before the financial crisis of 2008, many people were getting loans from banks and putting down 3% or less, instead of the usual 20%. Let's say that this house you bought went from being worth $100k to closer to $50k. It seems drastic, but it happened all over the U.S. In this scenario you now "own" something that is worth $50, but you owe $80 on your loan. In other words, you are now underwater.
Even if housing prices go up 50%, you are still underwater. Doesn't seem fair, right? If they drop 50% and then increase 50%, then one should be equal. Not true. If they drop 50% from $100k, then your home is worth $50k. If it increases 50% from $50k then it is only worth $75k. Remember, your loan is still $80k.
So assuming you are underwater, you have three basic choices: keep paying your mortgage, foreclosure, or short sale.
Many people get discouraged paying a mortgage for a house that is hundreds of thousands of dollars underwater, and it is likely not a good use of your precious funds. Getting foreclosed on is easy -- just don't make any payments and wait until someone like me shows up at your front step and tells you to leave.
This process could take longer than a couple of years, so make sure to save up! The other option is to do a short sale by selling your house for less than you owe. As I mentioned, the key in a short sale deal is that the bank needs to approve to sale.
Using a short sale to your advantage
Anyway, back to the point of how to make money and get a great deal on a short sale. The first thing to know is that the owner/seller is in control of who the home is sold to. The bank can't run around trying to find a buyer -- only the owner can. The bank ultimately has to approve the deal, but they can only approve deals that the seller/owner brings to them.
The other important piece to understand is that in a short sale deal, the seller/owner shouldn't care at all about what the sales price is, as long as it is less than the amount they owe. In our example, if the home is sold for $1k or $75k, the owner gets nothing from the sale because they still owe the bank $80k. If the home sells for $79k, then the bank still gets all of the proceeds because the loan is worth $80k.
So how does one come by a great deal? The answer is to incentivize the seller.
Let's say, using our example, that you put your house that is worth $50k on the market for just that, $50k. You are already going to lose money on this house (your $20k down payment), and therefore you aren't going to put another dime in to fix the list of things that are wrong. I come to you and say, "Hey, I will buy your house for $20k, and I will give you $5k to help you move."
Would you take that over an offer of $50k, where you get nothing? Most people would, and it's perfectly legal. Just make sure to put it in the purchase contract.
Finding short sales in your area
A great way to find people who are underwater is to use ForeclosureRadar or any myriad of sources that list public foreclosures. Chances are that if their home is listed for foreclosure sale that they are underwater. Create a flyer telling people that you want to buy their home, possibly with the help of a real estate agent friend, and go around sticking them into mailboxes of people on your foreclosure list. This isn't a high percentage game -- most people won't respond. However, just a couple of short sale deals a year can make you quite the bundle of dough.
The strategy that has worked for me on short sales that are already on the market is to offer the listing agent the listing on your flip. This may seem sketch, but the reality is that the listing agent is still securing their client the most amount of money and selling the house. Again, it is a strategy that requires a lot of leg work.
Once you find a seller who is willing to sell their short sale home for a good price to you, make sure to have a beer and congratulate yourself -- for about ten minutes. Then you need to get back to work because the bank still needs to approve the deal. For this you need a contractor -- and preferably two -- on your side.
Basically, you have them go through the house and put in bids to fix absolutely everything -- and at top dollar. You won't end up paying them to do it for top dollar, but you will take these bids and submit them to the bank as the justification for the low sale price. It may take some time to negotiate, but more often than not the bank will actually be scared by the extremely high bids and accept your offer.
Finding good flip deals is hard, but the formula is doable. Pound the pavement and be resourceful. Good luck!
This article originally appeared on Bigger Pockets and is Copyright 2014 BiggerPockets,
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