4 Ways for Wholesaling Short Sale Properties and Risks of Doing So
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
In this article I will be discussing four ways to wholesale short sale properties, along with the risks associated with it.
As an owner of a short sale processing company, I deal with short sales and real estate investors on a regular basis. And speaking from my experience, wholesale deals on short sale properties are extremely rare.
Read on to learn why and how it works.
Can You Wholesale a Short Sale Home the Traditional Way?
As most of you already know (and for those who don’t, I suggest to read Real Estate Wholesaling 101 — Explained for Beginners), here is what a traditional wholesale deal typically looks like:
Buyer “A” gets the subject property under contract for $100,000, knowing that he can get a cash buyer in place for $110,000 (Buyer “B”). The contract is assigned to Buyer “B”. He closes on the property for $100,000 and pays Buyer “A” a $10,000 assignment fee. So, Buyer “A” assigns his equitable interest in the contract to Buyer “B” for a fee of $10,000.
The example provided above would not be allowable during a short sale transaction. Short sale lenders do not allow assignment of contracts during the deal.
Why not, you ask? The answer is very straightforward.
The Purchaser Must Take the Title
When the subject lender allows a short sale transaction to take place, a short sale approval letter is issued. The letter will contain the name of the buyer or buyer’s entity they are purchasing under. In other words, the approval is buyer-specific.
The purchaser listed on the letter is the only person allowed to take title to the home at closing. If the end-buyer is different from those named on the approval letter, then a new letter would need to be generated, containing the new purchaser’s name or entity name.
Deed Restriction
There is another common wholesaling technique: double closing on a property. But it’s complicated by the fact that a high percentage of short sale transactions have deed restrictions placed on them by the lender.
A deed restriction is a private agreement, listed on the deed, that restricts the use of real estate in a given way.
The type of deed restriction that is commonly found in short sale transactions prevents the buyer from immediately selling the property for a profit.
Lenders began placing deed restrictions on properties after the last financial recession, when savvy investors were double closing and making large profits on short sales. From the bank’s perspective, they felt as though they were getting ripped off, seeing the excess profits investors were making that could have otherwise be theirs.
Here is what the verbiage of a short sale deed restriction can look like:
“Grantee herein is prohibited from conveying captioned property for a sales price for a period of 45 days from 11/6/2019. After this 45 day period, Grantee is further prohibited from conveying the property for a sales price greater than (120% of the sales price) until 90 days from 11/6/2019. These restrictions shall run with the land and are not personal to the Grantee.”
As shown in the example above, the lender is controlling when the new buyer is able to sell the home and at what price, for a given period of time.
Verbiage like this is common in a short sale deal and will prevent a double close real estate exit strategy.
As you see, there are serious limitations making wholesaling short sales difficult. Now, let’s look at how to deal with them in order to successfully follow this real estate investment strategy.
4 Nontraditional (Yet Risky) Ways to Wholesale a Short Sale Property
The restrictions described above don’t make wholesaling a short sale impossible. There are four legal ways I’m aware of that you can use to bypass them. They all are quite complicated and still risky. But if you are in a situation when wholesaling a short sale property is a necessity, here is how they work.
#1 Use a Land Trust
A land trust is an agreement where one party, the Trustee, agrees to hold title to property for the benefit of another party or parties, known as the Beneficiaries.
When attempting to double close on a short sale by using a land trust, the name of the buyer on the purchase contract is typically the trust. The primary buyer will be named as the Trustee. Lenders require buyer’s LLC documentation to be submitted with offers. So in this case, the buyer will submit copies of the trust documents to the bank.
At closing the beneficial interest of the trust is assigned to the end-buyer for an assignment fee.
#2 Create an LLC
Creating an LLC together with the end buyer, buying the short sale property as an LLC, and then selling your LLC to the end buyer is another potential way to wholesale short sales.
Creating an LLC will typically cost between $100-$500 and can be done by a licensed attorney in your state or by yourself online.
In this case, the name issued on the short sale approval letter (the LLC) is not changing when the buyers change hands.
This strategy is highly-dependant on the laws of the applicable state in which the subject property is located.
#3 Put Your Buyer’s Name on the Deed
Create contracts related to the deed, stating that the deed will be transferred to the end-buyer at the conclusion of the deed restriction period. The title company can hold the deed in escrow.
This strategy is highly-dependant on the laws of the applicable state, in which the subject property is located, as well as the cooperation of the title company.
#4 Use a Hard Money Lender
During the deed restriction’s no-sale period, an investor can find a hard money lender to put up the acquisition and holding funds.
Due to the added risk, the hard money lender will likely require a sizable down payment and possibly some type of written agreement that proves you have an end-buyer already lined up.
Pros and Cons of Wholesaling a Short Sale Property
Pros
There are two main advantages to wholesaling short sales.
Profitability
Similarly to traditional wholesaling, there are profits to be made when wholesaling short sales. As long as the property is purchased at a low enough discount, there should be a sizable profit spread.
Fewer Competitors
Wholesaling the traditional way is more popular and common among real estate investors. This creates an opportunity for a niche in the wholesaling business with short sales.
Cons
Legal Issues
Use extreme caution when attempting to complete any of the wholesaling methods above! There have been numerous cases where wholesalers end up in jail. I highly advise you to get a reputable lawyer in your state and involve them in every transaction.
There are legal ways to prove to the bank and authorities that the “as-is” value of the property was fair and that there was no fraud. But even with a good lawyer, do you really want to risk and waste your time and money for stressful and costly legal proceedings if the lender suddenly feels deceived?
After all, the restrictions described above were created to prevent you from making profit on short sales, and this is exactly what you are trying to do.
Time Expenses
Short sale transactions are very lengthy, ranging from 3-5 months. The total time needed will depend on the complexity of the subject short sale. A best case scenario will still take around 2-3 months. Sometimes they can take longer if the particular file is really complex.
At the conclusion of even a successful short sale transaction, you may find that the time, energy, and cost associated with the deal were not worth it: you could have spent the same amount of time to wholesale two or more regular properties and make more profit.
Much Hassle
Short sales are difficult to begin with, let alone adding the supplementary complexity of the aforementioned methods.
For example, imagine having to deal with processing two mortgages (primary and secondary), while at the same time coordinating the wholesaling aspect of the deal.
In my opinion, when comparing the potential profit size to the difficulties associated with getting the transaction completed, it is more beneficial to take on the simpler and 100% safe deals.
How to Legally Monetize Short Sale Properties the Safe Way
I hope that everything written above gives you enough information to decide whether or not it makes sense for you to try wholesaling short sales, and if yes, then how.
But what if your answer is ‘no’? Does this mean that the money you spent for the ‘dead’ underwater leads is wasted?
Fortunately, it doesn’t. And you have two options to monetize them.
The first way is to do research and find a few short sale processors in your location to offer them these leads. Hopefully, one of the processors agrees to pay you a fee for every closed short sale.
The second option is easier. By joining the nationwide HouseCashin Referral Network, you skip the time-consuming research and numerous negotiations with short sale processors. Here is how it works:
- You refer an underwater pre-foreclosure lead to HouseCashin via an online contact form.
- HouseCashin’s short sale experts work directly with the lender and the homeowner to make the short sale happen.
- After the short sale is closed, you get paid $500.
Learn more about HouseCashin Referral Network.