Investment Strategy #4: Short Sales


Every now and then there is someone who finds a way to owe more on their house than the house is worth. They accomplish this through a combination of home equity loans, second mortgages, interest-only mortgages, and other liens against their house. If you owe $215K on a $200K house, nobody's going to pay you $215K for it and no real estate agent will sell it because they can't get their commission from the gain on the sale. Your options are foreclosure and a short sale investor.

In a situation like this, the only person who wants this house less than you is your banker. A bank loses tons of lending power when it has to take a foreclosed house. What about the home equity loan, the second mortgage, and the contractor who has a lien on the house because he put a swimming pool in the backyard and never got paid for it? If a house goes to foreclosure, all of these people basically get nothing.

A short sale investor knows how to talk to banks, lenders, and anyone who wants money from the owner of the house. Short sale investors can explain to all of them that the house is going to foreclosure soon and, if they want any money at all, they'll have to settle for less than the full amount they're owed. A short sale investor can talk a home equity lender into accepting $4,000 for their $20,000 loan, the second mortgage lender $5,000 for their $40,000 loan, or a contractor $500 for their $10,000 outstanding bill. That's better for these people than letting the house go to foreclosure and getting nothing, and suddenly this $200K house that was $15,000 in the negative can now be bought by the investor for $170K and won't get foreclosed on.

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