Many people read about how to start investing in real estate, but are not yet informed enough to go out and start investing. I’ll spend the next few minutes telling you how I got started investing in real estate when I was only eighteen years old. I am now twenty-three years old and have completed fifty deals in the last five years.
There are three types of investment techniques that you can get started with without using any money. They are wholesale, subject to and short sale. I used all three techniques when I started investing. However, all three were extremely challenging in their own way and I made a ton of mistakes that could have been easily avoided if I had the proper guidance. I’m going to go over one of the techniques I used below to help you better understand the process.
Short selling is a great way to help people who need urgent financial help and also a way to earn a substantial amount of money. This process is certainly a win-win situation and can quickly make you understand why this business is so great.
A short sale is a process by which a mortgage company discounts a loan that is in default (foreclosure) to avoid having to go through the foreclosure process and gain ownership of the property. A foreclosure costs the bank a lot of money and in the end it always loses. There is an entire department called the Loss Mitigation Department at the bank that mitigates the bank’s losses and works with clients to complete short sales. This is where you, the investor, can trade off huge debt and essentially create money out of thin air.
You can use this process to help someone who is going through foreclosure. If someone is in pre-foreclosure and behind on their payments, they are a perfect candidate for you to work with. At this point, most people in this situation have had something major happen recently, either a job loss or an adjustable rate increase. Your job as an investor is to help these people get out of this situation and make a profit doing it.
Start by evaluating the property to determine its current value and the balance you owe to the mortgage company. Once you determine some basic values, you’ll be ready to begin negotiations with the mortgage company. You offer the bank an amount that you think is a good enough offer for the bank to accept, and it is still low enough that you can sell the property at a profit. For example, if the owner owes $150,000 on the property and you think the property is worth $125,000 (the amount you think you can sell it for), you would offer the bank about $100,000. This is a completely realistic scenario and I do take offers. as is regularly accepted.
Once you are in the negotiating process and the bank receives your offer, they will submit a BPO or “Brokers Pricing Opinion” to find out what a local agent thinks you are worth. At this point, you will meet the agent and explain what he is paying for the property and that he hopes he can help the seller. The trick is that even if the BPO comes back to the bank at a price higher than your offer, they will still accept about 82% of that value. This is the magic number for most banks, however some may have guidelines that require a slightly higher percentage.
Now, while this whole process is taking place, you need to find a buyer. This can be a bit tricky in how to do it. I personally use the local MLS to list my properties. I take possession of the property at the beginning of the short sale process through several different methods. I have title in escrow and I am listing the property for sale pending approval of the short sale. By doing this, I locate an “ultimate buyer” who is going to buy the property from me.
All of these things can get a bit tricky and confusing if you’ve never done it before, but once you’ve mastered this process, you’ll be able to make tons of money. This is the only way I’ve seen where you can actually create your profit from negative equity.
I hope this has helped you begin to understand the process of a short sale.
