How to do short sales and pre-screen your leads is simple but rather confusing in the beginning. – I often get asked, “when do I know when a short sale is worth pursuing?” This is a really good question and if  you don’t know you have a huge potential of wasting a ton of time focusing on the wrong deals. You can make money on just about any short sale, but some may be as little a 1k, while the investment opportunities you are really looking for can bring a profit in the tens of thousands and possibly hundreds of thousands of dollars. So let’s break this down so you know what you are looking for in your short sale deals.

First lets discuss the function of a short sale from our perspective. When we find a short sale deal you will need to cash the seller out, meaning you need to come up with the money to buy. Therefore you need a substantial discount to justify the purchase. To determine the investment property value, typically you will follow this equation to ensure you get a good deal, ARV x .7 – Repairs = Max Offer. This will need to be adjusted depending on your end strategy and you current market.

In order to buy properties at these kind of discounts your offer needs to be justified, usually by the amount of repairs needed. The bottom line is we are looking for Junkers. The uglier the better. Now, there is one exception as we will discuss soon.

Now lets look at this from the lenders (short selling company) point of view. If you find a property that has an ARV of 150k and the property is owed 120k to 150k+ and needs no or little work. In order for you to buy you will need to purchase at 105k (150k x .7 –  no repairs = 105k) or less. If the property is in good condition, worth 150k, needs no work, when and if the bank forecloses on the property they will be able to turn around and sell for 140k to 150k. They will pay commissions and closing costs which will cost them a max of 10% of the sales price. So, if they sell at 140k and they pay 14k is sales costs they will net 126k, possibly more if they sell for more. Accepting your offer of 105k simply doesn’t make business sense. And in most cases they won’t. This means they will take a 21k unjustified loss. There are rare exceptions where they will but not something you want gamble on. It’s better to pass on the unlikely deals and spend your time on the ones that will most likely work for you.

If this same property needs 20k in repairs we will need to buy at 85k or less (150k x .7 – 20k = 85k). 20k in repairs typically looks like 35k to 40k in repairs to the untrained investor. When the lender does their BPO or Appraisal it is very common for them to use the 35k to 40k number for repairs which plays in our favor. If they foreclose on the property they know they’ll need to discount the 35k to 40k plus an addition spread since investors will most likely be the only one offering to buy.  It really comes down to this question for the bank, “whether we sell before or after the auction who are we selling to”. If the property is in good condition it will be an owner occupied buyer. If its a Junker it will be an investor requiring a substantial discount above the cost of repairs. If they know the property needs to be sold to an investor they would rather take the discount today rather than holding off and foreclosing.

When coming across a short sale in good condition, don’t throw it away. There is money to be made, not a lot, bet at least some. You’ll want to find a successful short sale Realtor and make an arraignment with them. You will want to sell them your good conditioned short sale leads. The arraignment I have is I get paid 30% of their commissions when they sell to an owner occupied buyer. I can get paid this way since I am a Realtor myself. If you’re not licensed you will need to be careful with this. You can’t legally get paid a commission or paid contingent upon a commission unless you’re licensed. If you aren’t, you can get paid for providing leads. This mean you get paid whether the Realtor closes a deal or not. You will probably get paid less per deal, but at least you get paid for all the referrals.