Today’s REI Classroom Lesson
Brian Meara goes over various exit strategies for short sales, along with a few differences that short sale deals have compared to other deals.
REI Classroom Summary
From renovating the property to getting out of the deal (while still making money), Brian shares the options you have have a short sale deal.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the FlipNerd.com REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Brian: Hey guys. Brian Meara here from the Investor Entourage here as today’s host for your REI classroom. And the topic we’re going to talk about today are the four potential exit strategies when dealing with a short sale.
Mike: This show was sponsored by www.passiverental.com.
Brian: Okay, guys. So, people say all the time, “Well, Brian, you know, you teach this flip free method that you, you know, created which is basically the whole selling of a short sale and the stepping aside of a deal if it doesn’t make sense to actually buy it, but is that all you do?” And I would tell you, “Absolutely no.” As a matter of fact guys, I would tell you that’s the worst case scenario.
You know, the funny thing with it is with a short sale, unlike any other deal that you’re getting involved in, when you are marketing for real estate, you’re going to be an investor, you are an investor. You’re trying to put properties under contract let’s say to wholesale them. Let’s say, you’re going to do a fix and flip, or you want to buy it to do a buy and hold, right? You want to put a 10 in there and have an ongoing rental property in your portfolio. When you sign the contracts with the seller and you guys come to terms, you know the terms. You know how much the seller’s going to sell for, the buyer’s going to buy for and it’s . . . Let’s go to closing, right?
Short sales are different. You have to enter into the negotiations knowing that it’s exactly that guys, it’s a negotiation. So, you go under contract with the owner of record, and they agree, you agree, you put your paperwork together, and now it goes off to the bank, or banks. And this is where it becomes interesting. You know, people say all the time, “Well, what are you going to do with this property? What do you think we should do with that property?” I don’t know. And furthermore, neither do you, because until you know what the acquisition price is, the price that you’re actually able to buy the property for, how can you possibly determine your exit strategy? As an investor you can’t.
Everything comes down to mathematics, and in order to calculate your ROI and your potential income on a property, you have to have all the figures. And unfortunately guys, with a short sale, it doesn’t come until the very end. It doesn’t come until after the BPR or the appraisal, right? The bank does what they call a valuation. Then you enter into a counter phase where it’s basically they counter your offer, and guess what? They always do.
Then you counter back to them, and you come to terms, and now finally you have a verbal approval. And then they’re going to issue you an approval letter, and now once you have that piece of paper in your hand and you know technically even at the verbal approval, but funny things can happen, so it’s really not set in stone until you have that piece of paper called the Approval Letter, you’re not going to know what you can buy the property for. And then and only then can you determine what you’re going to do with the property.
So, what can you do with it? Well, there’s four possible things you can do, okay. Number one, you can renovate the property. You can improve, you can actually buy it, use hard money, use private money. Whatever you need to do you purchase that property, you put some money into it, you renovate it, doesn’t matter if what we . . . It’s what we call lipstick on a pig, right? Just paint, carpet, clean it up, or if you’re going to go in and actually rehab it. You’re going to put in a new kitchen, you’re going to redo the bathrooms. You’re going to put on a new roof. Whatever the case may be. You’re going to do a fix and flip. You’re going to go in, clean it up, relist it, get it out of your buyer’s list, and sell.
Second option would be to buy and hold. You know what? You’re going to get this property at such a good price, you’re going to clean it up a little bit, you’re going to put a tenant in there. And now you’re going to have a monthly cash flow for you. You may want to build up a whole portfolio of rentals. A lot of guys do that. That’s as an option.
Option number three. Create a note. Become the bank. Actually hold the paper. You can now sell the house with seller financing and you become the bank. So, if you’ve ever wanted to get involved in notes, this is an excellent way to do it because all you’re doing is controlling the property. You can now sell it to another investor who wants to be that landlord, who can then put the tenant in there, and you hold the paper. Excellent strategy, works all the time.
Fourth and finally, would be get out of the deal, right? You came to the end of the deal, and you realized what you’re going to buy for this, and just doesn’t quite make sense for me to really put the money into it, or buy and hold it, or what have you, or create a note. So, we’re just going to exit the deal, but we’re not going to exit it without getting paid. We’re going to do a called a Release and Termination of Contract, we’re going to collect some money for stepping aside from the end buyer who generally is going to be a retail buyer at that point, which is fine. We put it back on the MLS, we attract a buyer, and away we go.
So guys, why didn’t you . . . You know, people say all the time, “Brian, short sales aren’t really as prevalent as they used to be, and back a few years ago they were everywhere.” Yeah, I get it. I know, I still do them every day. But there’s still plenty around that once you understand that once you control the property, and you have four different specific exit strategies to deploy, it becomes a very powerful way to acquire properties guys, because you could literally do anything you want with it. That’s why they’ve always worked, that’s why I still work them, and why I always will.
So, I hope that helps. Get out there and find them, and know that you have different options for when you’re actually ready to close the deal and make some money. So, until the next time, we’ll talk to you soon.
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