In a depressed real estate market filled with properties that are in foreclosure or heading to foreclosure, successful real estate investing must involve short sales, or negotiating with mortgage lenders to accept less than the mortgage balance to sell a property. 

 It is therefore important to know when a short sale is necessary to make the deal profitable. 

 These tips will help you identify when to do a short sale.

Why do a short sale?

Lenders have more than enough properties that have fallen through that they are trying to sell. 

 They need to make loans, not acquire more properties.  Each defaulted property in their inventory counts against how much they can lend.

The more properties they have, the less they can lend, and the less profits they stand to gain. 

On the other hand, a motivated seller would be better off avoiding foreclosure and bankruptcy by doing a short sale and walk away from the property. 

Therefore both the seller and the bank stand to gain through a short sale. 

1)    Where to get short sale leads

The best time to do a short sale is before a property goes into foreclosure.  Depending on your state, from the time the foreclosure notice is filed in court, you could have as little as three weeks to several months before the property is foreclosed. 

In general, it takes 2 to 4 weeks to get the attention of the bank.   If the offer you make looks attractive to them, they can stop foreclosure. 

 If your state allows enough time, then foreclosure notices files in the court house may be a good source of leads.

 If you state does not give enough time, then regular motivated sellers may be your best bet. Then you can do a short sale. 

2)     Which are the best deals for short sale? 

 If you can make an offer the bank cannot refuse (such as 80% to 90% of mortgage balance) to create enough equity to make a good profit, a short sale may be the way to go. 

 Deals with  a second mortgage are very attractive.   A holder of a second mortgage can lose all their investment in foreclosure.  They can therefore negotiate as little as 10-20% of mortgage balance. 

 Negotiating both first and second mortgage can create a lot of equity for you.   Each loan is discounted separately, creating a lot of equity for you.

If there is only one mortgage, the mortgage balance must be low enough to give you a profit if they discount 10-20% of the mortgage balance. 

Of course lenders can discount more than this but I like to have a safety net before I can spend time on the deal.