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Short Sales 101

Short Sales 101

**Disclaimer – This is not legal advice. Please consult an attorney or tax professional for the appropriate legal advisement. Furthermore, you can expect to find many typos, improper English and made-up words. Author Ryan Paliukaitis (RyanPal)

What Is A Short Sale?

A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts. Whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.

Where Do I Find Leads?

These leads can be found through the same source leads you would use when searching for foreclosures. Please refer to the Foreclosures 101 article for more information.

How Do I Flip Short Sales?

Flipping short sales is still possible, however, over the past few years it has become increasingly difficult. Just for clarification, when I say “flipping”, I’m referring to quickly turning over the property without rehabbing the home. In 2007 & 2008 flipping short sales was done without having too many restrictions from the bank. As time went on banks started putting more clauses in their approval letters, which made it increasingly difficult to flip short sales on the same day (also known as “back to back” closings or A-B B-C closings). Many of these clauses still exist today. With these new challenges, investor’s are required to have the proper paperwork and short sale flipping strategy in place.

What Are These Restrictions?

The most important restrictions that affect “short sale flippers” are the clauses that prevent the buyer (investor) from reselling the property for 30, 60, and sometimes 90 days. There are a few methods to get around these restrictions. Here are three of them:

1. The investor can setup a LLC that will be purchasing the property. At closing the investor can sell the LLC and change the members.
2. The investor can purchase using a living trust and then change the beneficiary.
3. The investor can close A-C; meaning the investor (B) gets compensated to cancel their contract with the seller and allow the end buyer (C) step into their shoes

Personally I have done #3 and I feel this is the most protected and comfortable with this method.

What Paperwork Do I Need?

You can download some of the required short sale documents here. You can combine these with the contract you’re using along with any other documents that are required with your exit strategy. These documents are accepted by most banks. In some situations, the lender will require a short sale package with their proprietary documents. If such documents are required, instructions will be provided by the lender. Call the main number and ask to speak to the loss mitigation department. Upon speaking with a representative, tell them you would like to proceed with a short sale and you need to know howto obtain the documents for a short sale package submission.

How Do I Structure A Short Sale Flip?

The short sale flipping strategy is simple. We need to buy these properties at a discount. This requires close interaction with the listing agent, the banks BPO agent and the banks negotiator. While working hard to get our offer accepted, you shop around for a buyer who is willing to pay more for the property. It’s a careful juggling act, but if coordinated correctly; we can still profit. We can buy and sell (A-B B-C) or close (A-C) and make money on the difference between our short sale approval amount and our resale amount.

What Are the Drawbacks to Short Sales?

Like any real estate strategy, there are both drawbacks and benefits. Here are some of the pitfalls:

-Very time consuming (it’s not uncommon for short sales to take 1 year plus to close, and in some cases a lot longer)
-High failure rate
-Many restrictions on short sale approval letters (makes it difficult to flip quickly)
-Tedious paperwork

On the flip side here are some of the benefits:

-Large profit margins
-Less work for the investor (this is true if you have a proper system in place)

Is Short Sale Flipping Legal?

If done correctly, it is 100% legal. To be compliant with the law and to CYA, make sure you have the proper paperwork in place, abide by the terms set forth in the short sale approval letter, and make the necessary disclosures to ALL parties involved. When done properly investor’s can make good profits through short sale flipping.