The short sale, like the subject-to purchase, is yet another way for a savvy investor to purchase a home with very little money. While subject-to allows you to simply take over payments of the property’s existing financial structure (mortgages), short sales allow you to purchase a property well below market value without having to take out a mortgage at all. Here is what happens: an owner cannot make the mortgage payments on his house, and the bank is facing the possibility of having to foreclose the property to collect their money; foreclosure means big fees for the bank and terrible credit for the owner, so both parties agree to sell the home, even though the proceeds from the sale may not cover the outstanding balance of the loan. These short sales happen because the bank decides that the loss they will suffer by selling the house cheap will be less than the loss they would suffer during foreclosure—plus they get the money now. A start-up investor with little principal (or any smart investor) will know how to find short sale opportunities and negotiate for the purchase of a property well below its market value.

If you are involved as an investor in a short sale (and if you’re involved, let’s hope that’s your role!), don’t be surprised if you are the only satisfied party walking away from the deal. Both the bank and the homeowner are facing a difficult scenario, and the investor merely swoops in to capitalize on the situation. From the owner’s perspective, he is losing his home, but mitigating the damage to his credit caused by owning a home and mortgage he can’t afford. The bank minimizes its losses by avoiding foreclosure or continuing to not receive monthly payments, but they are still taking a major loss on the value of the property. While neither party will be happy, both will consent because it is simply the most prudent economic choice.

Enter the investor, who provides the bank with some of the money they need to cover the cost of their defaulted mortgage, and who provides the home-owner with a way out of his sticky and expensive situation. If you can time it right by finding a pre-foreclosed home, you can intervene to purchase the home at an enormous discount (even more than if you waited for the foreclosure auction). The beauty of this is, while foreclosure auctions are highly competitive and therefore relatively expensive, the short sale market remains largely either undiscovered or unsolved. If you can find pre-foreclosures, you will not face an overwhelming amount of competition standing in your way to buy. Not to mention, the selling parties will be very motivated. It all adds up to a huge discount for you, which you can turn into profit by renting, reselling, or whatever other means suits you.

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