What is a short sale? How does it work as a wholesale? How does a short sale & a REO differ?

A short sale is essentially a property that is in pre-foreclosure. These properties have homeowners who have fallen behind on their mortgage payments and now they may owe the bank (that gave them a mortgage) more than what the property is worth.

If the homeowner is not able to continue making payments on their house, then they can “short sale” their home. A short sale works only if the lender is willing to accept less than the full amount that is due on the loan. Which is why it is called a “short” sale because the amount they accept is “short” of the full amount.

Essentially, the lender is willing to sell the house at a cheaper price than what is originally owed on the property. When a successful short sale happens, everyone wins. It’s a great opportunity for you as a wholesaler because you can usually get property under contract below market value. It is also a great opportunity for the lender because they are able to recover some of the funds and are able to avoid a foreclosure on their property. Also, it is a win for the homeowner because they avoid foreclosure, which helps their credit to not be as affected by selling their home through the short sale process.

Some banks try to have you not wholesale a short sale, and some are not as stringent. Some banks let you simply switch/assign the contract from your name to your financing partners (cash buyers) name.

Some banks include something called a “deed restriction” on the property. A “deed restriction” essentially means that you CANNOT fully transfer title (assign) to another company within the restricted time periods. Some deed restrictions are 30-90 days.

If a company is stringent on you not fully transferring title to another company, then there are 2 work arounds:

1. You create a “tenants in common,” which allows you to distribute ownership of the home to another party, but you cannot fully distribute 100% ownership to someone else. So, what you do is transfer 99% ownership to the financing partner’s company and you retain 1%. After the 30-90 day deed restriction is up, you then transfer the last remaining 1% of ownership to the financing partner. This is one savvy work around.

2. The other work around is to assign the ownership of your LLC that you have it under contract with to the financing partner. So the financing partner will take over your LLC. I only recommend this if you have not done business in the LLC and if the financing partner is open to it. The assigning of the entire LLC is a viable strategy for any wholesale.

So that is how a wholesale works as a short sale. You either assign the short sale, double-close (also known as a simultaneous close), or you use the 2 other additional strategies I just mentioned!

A short sale is different than an REO property because the original owner of the home still owns the home. When you are dealing with an REO, the bank owns the home because the property has been foreclosed and taken over by the bank.