Friday, July 24, 2015

The Best Way to Buy a House in a Short Sale


A short sale is a complex process, but the math is fairly easy to understand. There's a $6.00 loan on a house that is worth $4.00. The seller wants out. They sell the house to the buyer for $4.00. The purchase money goes to the bank. The bank eats the $2.00 That's a classic short sale.

It's a Bankruptcy Without The Lawyer

Short sales are just like bankruptcies. In a corporate bankruptcy, one group of people is going to get screwed. It's either the bondholders, the shareholders or the bank. Usually its the shareholders. In a short sale, the seller is likely to be the one with the disadvantage, since they will take a hit on their credit and on their taxes. As the buyer, you're the one who makes all the problems go away, but you have to start in the right place and that's with the seller.

Start With the Seller

When we buy houses, we have to make it clear to the seller our participation has a money limit and a time limit. You also want to add just a little sugar to the deal so you have something other than a signature in the game to bargain with. Offer a 2% premium and put a hard clock on the deal. If the sale does not close by X date, you're out. That will likely sweep aside any static on the seller's end.

Both Ends Against the Middle

Once you have the seller on board you come at the deal from the bank side of the table. Get the seller's terms in writing and ask the bank for a term sheet. Put a clock on it. The bank is highly motivated to get out of the house and back into a revenue stream, so they are going to be cooperative if the deal is even close to making sense. Make the same offer here: 2% premium and the mortgage if the deal closes by X date or you're out.

Also be sure the bank is offering you premium terms on the mortgage or walk away. No sense in giving your equity back to the bank in the mortgage contract. Remember you are taking the risk and bailing two parties out at once. You should get most of the reward.

You Win

Work it right and when we buy houses we get a home once appraised at $6.00 for $4.16. Even if you put $1.00 into upgrades and repairs, you've got at least $0.84 in potential equity the day the deal closes. Now it's just a matter of how fast you can pay off that mortgage.

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