A short sale is simply getting a lender to take less than what is owed on the loan.

The term “short sale?comes from the fact that the seller will be selling you their property for a price which leaves them “short?of the money to pay off their loan. For example, if a seller owes the lender $50,000 on their property, and the seller sells the property to you for $40,000, the seller is going to be roughly $10,000 short of money to pay off the lender. Thus the term “short sale?

When & Why Lenders Will Do A Short Sale
Most of the time, a lender will consider giving a discounted "short sale" payoff when the seller is behind on their mortgage and the loan amount is at (or near) the property’s market value. Sometimes, lenders will even discount the loan payoff when the loan amount is well below the market value, especially if the property is in poor condition.

Some people believe that banks like to foreclose on property because they can take a property back for less than it is worth. Nothing could be further from the truth. Earlier we talked about lenders not wanting to enforce the due-on-sale clause when you take over a property "subject to", because if they foreclose on a property, it affects how much money the government will allow them to lend out on new loans. Also, there are other side affects such as lower company stock prices, and the possibility the bank could lose money when getting the property marketed and resold. The same holds true about getting a lender to do a short sale. If the lender can take a discounted payoff now, it saves them from the costs of foreclosure and all the other problems that come with taking back the property.

VA And FHA Insured Loans
Even if the loan is VA or FHA insured, it still is not in the lender’s best interest to take back the property. It is especially not in the lenders best interest to file a claim with the FHA or VA if the money they will get back is minimal, because FHA and VA do not insure the entire loan.

When Will Lenders Not Do A Short Sale?
Not all lenders do short sales. Some are simply stubborn and don’t know how to save their losses. However, most banks do short sales on a regular basis, but even those banks have instances in which they won’t discount the loan payoff.

The most common instance in which a lender won’t discount is if the seller is not behind on their payments, because lenders just aren’t going to take a discount on a loan that is being paid.

Don’t expect a low loan-to-value first mortgage to take a discount if the property is in excellent condition. A low loan-to-value first mortgage holder will usually only take a discount if the property needs extensive repairs and the seller is filing bankruptcy, which by the way will hold up the foreclosure process.

Can I Do A Short Sale With No Money Or Credit?
Doing a short sale requires no money or credit when it comes to getting the lender to take a discounted payoff. You will however have to come up with the money to pay off the seller’s loan. Remember, with the short sale strategy, you’re not negotiating to take over the debt. Instead, you’re negotiating a discounted pay-off.

This means you won’t be able to structure your financing around the existing loan because you are paying the loan off. So, you’ll either need to come up with new financing yourself, or have a buyer standing by that you can flip the property to by doing a double closing. If you plan to retail the property, you will usually get the money to pay off the seller’s loan from a hard money lender.

Properties That Are Good Short Sale Candidates
So, what properties are the best candidates for doing a short sale? As we said a minute ago, lenders almost only discount when the seller is behind on their payments. Therefore, the seller should already be at least two to three months behind on their mortgage payments, or already be in foreclosure.

Houses that are ugly can be the best candidates for doing a short sale, mainly because banks don’t want to take back a property that needs work, or any property for that matter.

Properties that have very large second or third mortgages make especially good candidates for a short sale, because those second and third mortgages are subject to a very steep discount. If the property goes to foreclosure, chances are those second and third mortgages will get nothing, and they know it.

Even if you can’t get a discount on the first mortgage, you can still get a major discount on the second or third mortgages, and make a deal for yourself.

This how to article is an excerpt from the Real Estate Investing Quadrant Success System course.

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