Dear MSM reader,

When foreclosure looms, an investor in the right place at the right time can create a win-win-win situaton. In today’s issue, short-selling expert Dwan Bent-Twyford reveals how to turn no-go real estate deals into highly profitable ones.

Secrets of Short Selling Real Estate

By Dwan Bent-Twyford

As a real estate investor, you’re almost sure to make the most money when dealing with motivated sellers.

Sometimes, they just want to get rid of the property and are willing to sell it to you at a price where you instantly pick up a lot of equity. Other times, they need to sell quickly, but have little or no equity at all in the property. In other words, the difference between what the seller owes and what the property is worth is nothing or almost nothing. In some cases, the seller might owe more than the property is worth.

So how do you make money in a situation like that - where the seller has little, no, or even negative equity?
With a short sale.

A Short Sale in Real Estate Is Nothing Like a Short Sale in Stocks… and It Can Be Far More Profitable

A short sale in real estate is when you get the bank to accept less than what is owed on a property. For example: You find a homeowner in distress who owes $100,000 on a property that is worth $100,000. What do you do? Most investors would walk away. But by using the right short-sale techniques, you can get the bank to accept $55,000 as payment in full.

By doing that, you will have created equity in a deal that had none. The seller will be ecstatic, as he can now move on with his life. And the bank will happily take a defaulted loan off its books.

A short sale is a win-win for everyone involved.

The key to taking advantage of this strategy is to understand the dos and don’ts of working with a bank’s loss-mitigation department.

Making the Bank’s Loss-Mitigation Department a Friend, Not a Foe

As soon as your motivated seller is comfortable with you and your short-sale package, the time has come to work with the bank. So you make a call and ask for their loss-mitigation department. (In some banks, it will be called the work-out department, foreclosure department, short-sale department, loan-modification department, or reinstatement department.)

Once you have the bank’s rep on the phone, get to work. This person will make or break your deal, so be very nice. Your initial conversation should go something like this:  

"Hi, my name is Sue and I am calling on behalf of Bob and Sally Smith [the distressed homeowners]. I have an ‘authorization to release information’ form I’d like to fax to you. What is your fax number? Great, I’ll send it right over."

Stay on the phone while the rep retrieves the form from the fax machine. When he returns, continue the conversation. It should go something like this:

"As you know, Bob and Sally are in foreclosure. I recently met them and they seem like sweet folks. When I found out about Bob and Sally’s dilemma, I said I’d try to help. They would like to sell their property and get on with their lives. I own several rentals in the area, and I am willing to purchase Bob and Sally’s property. However, we have a big problem.

"I called a real estate agent friend of mine and asked her to run comps for me. Based on her comps and what I know about the area, Bob and Sally owe much more than their property is worth. As I said, I’m willing to help them out of foreclosure - and help you get a defaulted loan off your books - but I can’t possibly pay the mortgage balance. Would you consider some sort of short payoff or something along those lines? Great! What do you need from me?"

By taking this approach, you will not come across as a professional investor out to make a killing on the bank’s loss. Many investors choose to present themselves that way, but I think you will have much more success as a friend trying to help Bob and Sally. (I certainly have.)

Use either approach - whichever one makes you feel most comfortable. But never lie to get the deal. Given the above scenario, for example, it would have to be true that I did recently just meet Bob and Sally… that I do have rentals… that I do have a real estate agent friend… and that I am willing to purchase Bob and Sally’s property.

In your conversations with the bank’s loss-mitigation rep, be certain to refer to your distressed homeowners by name as often as possible. This makes them seem more real. (Keep in mind that you are trying to build rapport with the rep - trying to get him to make an emotional as well as a business decision.)

After you send your short-sale package to the rep, call him at least once a day to follow up. Always ask him how the day is going, how the weather is where he is, how the kids are, and so on. You want the rep to look forward to your calls, not dread them.

Find out who makes the actual decision, how long it typically takes, how long the rep can give you to close once your proposal is accepted, etc. If you maintain a helpful attitude, your loss-mitigation rep will push it through quickly.

When your short-sale proposal is accepted, get it in writing immediately. Find a buyer for the property or arrange financing, and get the deal closed. You don’t want anything to happen between the bank’s acceptance of the short sale and the closing.

Once the deal is closed, send the rep flowers or a gift basket and write a letter to his boss saying how much you appreciate the professional way you were treated. The rep will remember you - and the next time you call about a short sale, he will be more than willing to help you again.

Loss mitigation: Friend or foe? I say friend!

 [Ed. Note: Dwan Bent-Twyford is a full-time real-estate investor and a national speaker on short selling and creative real estate investing. To learn more about her most effective techniques for finding and closing short-sale deals, Click Here.]

Reduce Your Risk By Knowing Your Net Cash Flow

Your cash flow from a property is basically your profit after all expenses but before income taxes and depreciation. A few of your bills, however, like property taxes and homeowners insurance, may not be paid monthly. But you have to take them into account.

So for the sake of creating a cash-flow projection divide their annual costs by 12 and plug them into your monthly expenses. After doing that, your monthly net cash flow will also represent your margin of safety.

Divide your monthly net cash flow by your monthly effective gross rents (gross rents minus your allowance for vacancy). That’s the percentage your rental income would have to fall before you started losing money.

Even if you’re flipping a property, this is an important risk-control factor. If the market suddenly stalls or falls, a healthy net cash flow means you have the option to wait for prices to improve rather than selling at current, depressed prices. Also, if rents fall while you’re renting out the property, you’re less likely to lose money every month.

[Ed Note: Mainstreet Millionaire is a program designed to take you from your first deal through your step-by-step system on how to purchase cash-flow properties below market value and use creative financing techniques to close the deals with the least amount of expense, time, and risk.]