The Importance Of Using Correct Paperwork In Short Sales Real Estate Investing

Two events happened that dramatically changed my mind (and my paperwork!) about using these "generic" forms: First, I started closing many deals with a local real estate attorney who basically "shredded" my generic contracts. Second, the legislature in my State passed new foreclosure laws that specified how these deals were to be conducted and even what font type and wording was to be used in the contracts. Of course, the new rules carried with them the threats to do these deals correctly or we can fine you and/or "toss you in jail."

So what did I learn from all of this?

First, I make sure that my agents use the correct State Commission-based forms that contain all of the required foreclosure disclosures--on buying and selling.

Second, If I am using my own forms (Purchase and Sale contracts or Option contracts), I make sure these forms have all of the necessary foreclosure verbiage plus the required disclosures.

Third, I have a contract with my agents with the appropriate disclosures and the working relationship specified between the agents and myself.

Fourth, I have a separate document between the homeowner and myself with the appropriate disclosures and the details of the transaction. It is hard to have too much disclosure in foreclosure (short sale) transactions.

What is a "Short Sale?"

A short sale is a process, whereby the lien holder(s) accept(s) "less than what's owed" to release their lien(s). A lien is a charge (or encumbrance) against a property making it security for the payment of a debt, judgment, mortgage, or taxes. This process is normally facilitated between lien holders of notes and a third party--called a debt negotiator--and us the real estate investor.

The Big picture

Most short sale transactions involve the investor finding a motivated seller, engaging the seller, negotiating an offer with the lien holder(s), and hopefully selling the property to an end-buyer for a nice profit. The steps can look something like:

1. Find prospects, through marketing, networking, etc
2. Talk to a homeowner-via phone
3. Analyze the deal (pull comps, etc) and guess if "big" enough to not lose money
4. Drive to the property
5. Inspect the property
6. Expend time to "sign them up" and maybe "get the deed" and maybe "record the deed"
7. Gather bank required short sale documents-via email or snail mail
8. Negotiate short sale debt with bank-via phone, fax, email, etc.
9. Stage the property (if vacant) and sweat until offer is presented
10. Attend closing

The problem

I used to run my short sale business in a manner similar to the steps outlined above. However, as my volume began to grow, I fell into a time trap: I could no longer work new deals because I was too busy working the deals that I already had.

Then I would make a very bad business decision and slow down the marketing process to limit new deals. I would then work all of the current deals and find out that my incoming pipeline was empty. At that point, I was the "proud owner" of a feast or famine short sale business.

The Tip

The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.

We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.

To Your Success,

Tom & Svein