In the mortgage industry, the term “short sale” refers to the process of a bank holding a mortgage to accept less than the seller owes on that mortgage in exchange for the deed on the property. For example, John Smith owes $100,000 on his mortgage and is unable to make the regular monthly mortgage payments and it goes into foreclosure. If you are interested in the property, you can sometimes negotiate with the bank to accept $70,000 -80,000 on the mortgage, rather than have the bank take over the property through the foreclosure process. In the scenario above the bank wins because they are able to dump the property before they own it and have to deal with selling it. In addition, you as the investor win if you can then turn around and sell that property for its fair market value to someone else.
In the above scenario, even if the market value of the property is $100,000, and John Smith had no equity in the property, if you can discount the mortgage down lower with the bank, and then sell the property to someone else for market value, you have essentially created $20,000 – $30,000 in equity. This created equity is then your profit on the transaction.
Mortgage foreclosure issues are rampant in the news these days. And, because of the large number of foreclosures, banks are more willing than ever to negotiate short sales if they mean that they can get out of a property without loosing too much money. After all, banks are in the business of money not holding and selling properties. As a real estate investor, you can use this fact to your advantage.
For real estate investors, especially those interested in wholesaling properties to other investors, working short sales and thus creating equity can be quiet lucrative. The key to getting your short sale approved by the bank is in showing the bank why they do not want the property and how you can make them a good deal to take it off of their hands.