Short sales occur when home-owners default on their mortgage, and the bank and the owner consent to sell the home at a discounted price, even though the outstanding balance of the mortgage may exceed the proceeds of the sale. Although the bank takes a loss and the owner is out of a home, the discounted sale is better for both parties than the financial ramifications of foreclosure. Here are some reasons why every investor should at the very least know about, and probably should explore, short sale investing.

First of all, short sales are recession proof. Actually, short sale opportunities are at their greatest when the economy is its worst, because so many people are unable to pay their mortgages and desperate to avoid foreclosure.

You can purchase a short sale home with very little cash and absolutely no credit, which means investors at every level of the game have an opportunity to get involved in short sales. While the investor with no money can finance his investment with a mortgage, it is probably more prudent to find the short sale and line up a retail buyer to flip the home at its market value. That way, you are just middle-manning with someone else’s money, and then taking a nice cut for yourself.

Additionally, short sale investing usually requires very little marketing (which should also appeal to the start-up investor). In today’s economy, there is no shortage of people who are behind on their mortgage payments. You are bound to know someone who knows someone who would be a good short sale candidate. If you are having trouble spotting pre-foreclosures, just go to a realtor and ask your realtor to show you the active listings—pre-foreclosures account for quite a few of them these days.

As if you needed more reasons to invest in short sales, consider that everybody involved wins (you can’t say that about very many transactions involving debts and foreclosures). While they may not be happy about it, the bank avoids the expensive foreclosure process, the debtor avoids having the foreclosure on his would-be crippled credit history, the realtors take a commission, and the investor—you—walks away with a discount and an opportunity to profit. Everybody wins.

Although there is a lot of money to be made in short sale investing, you have to be careful in navigating your negotiations with both the seller and the bank. They will probably not be on the same page, and you may very well find yourself negotiating back and forth between them. It is important, especially for new investors, to find someone—an agent, a realtor, a mentor investor—who has experience with short sales. Walking in educated but inexperienced often results in deals that take months to close, if they ever close at all.

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