With all of the media attention surrounding short sales it is no wonder that so many investors want to focus their resources on obtaining these types of leads. But is this really the best strategy for you?

I decided years ago (long before the short sale bonanza) that I had no desire to do short sales. Since I am often asked why I made that decision I thought that I’d share it here so you can make an educated decision as to whether this is a good strategy for you.

I guess I should start off  stating that I see the advantages to short sales. There are a record number of home owners who now owe more than the property is worth which is usually due to a combination of  over leveraging their property coupled with depreciating values. Attracting these home owners and convincing them that you have a solution to their financial problem is especially easy in this current market place. That’s the easy part. And when a short sale is accepted by the bank, there can be some significant profit available in the deal that otherwise would never have been possible.

I have personally heard of investors making $50,000 to $100,000 on a single short sale deal. So I certainly can not say it is a bad strategy. But here’s why I never found it to be a good strategy for me…

What you hardly ever hear is that only a small percentage of short sale offers are accepted by the lender – especially at the number that makes the deal profitable for the investor. There is a tremendous amount of paperwork to complete which all requires the homeowner’s consistent support. THey are going to have to pull together a lot of financial information. Remember, one of the conditions of a short sale is that the home owner can NOT receive any proceeds from the sale. The only motivation for the homeowner, therefore, to go through all of this effort is avoid a foreclosure. Many feel that because of all of the late payments they’ll never be able ot qualify for a loan so let the lender foreclose: “Who cares?” is the typical sentiment.

Once the paperwok is complete and submitted to the lender, the next goal is to get it noticed. The loss mitigators are so behind right now that only a small percentage of the offers can get their attention. The serious short sale investor spends a vast amount of their time just following up on their offers (often to no avail). Some investors have over time developed relationships with some of the loss mitigators at specific lenders and therefore have a better chance of having their offer reviewed, but you need to recognize that in order to achieve that status with a loss mitigaor, many offers have had to have been made first.

Let’s say that the lender does review your offer, it can take literally months of back and forth negotiation to get the deal finalized, and what I repeatedly hear in the marketplace are horror stories of lenders stringing along a deal for months and yanking it at last minute preferring to foreclose instead. And of the deals that do get accepted they are placing more and more restrictions as to how quickly the property can be re-sold by the investor.

One investor who has made over a milion dollars in short sales revealed to me that he made over 1100 offers (think about all that paperwork!) and got less than 100 accepted. He did very well on he ones that he got, but he invested a lot of time, money,an marketing into getting those few.

My thought with short sales is that I don’t like having the 3rd party (the bank) involved in the deal – and I was doing these deals when they were called “short pays” long before the short sale craze. Back then you simply called the lender, talked to a loss mitigator and made a deal or not. I still hated the bank deciding whether MY deal was going forward or not. Who really wants to deal with…

Personally, I prefer to invest in more marketing to attract more leads where I can pre-qualify the right sellers where I do not need to involve the lender. For me, I feel more in control of my business and my financial future. How about for you? Is this the right strategy?

I would certainly never advocate this being your only strategy or even your first strategy. If you are going to do short sales, I recommend that you also have other strategies for attracting leads and creating deals, and reserve the short sales as the extra “gravy” in your business when they finally do hit. It makes far more sense to first start making steady revenue with an alternative strategy like straight wholeslaing, then add short sales to your repetoire.

I also advise that you work with a legal team that handles the back end negotiations and follow-up with the lenders. Some work on a fee basis and some work on a percentage of profits. This will ensure that you stay compliant with the evolving laws about working wiht homeowners in foreclosure; and because of their long standing relationships with the various lenders, they’ll have a better chance of getting offers reviewed.

Are short sales a viable strategy? Absolutely. Just be sure that it is the right strategy for you in your current business development.

Expect abundance,

Lou Castillo