With the Foreclosure Epidemic in full swing, a lot of investors are finding themselves more and more in the realization that one of the more profitable methods of going about their real estate investing business is to engage in short sales.

Problem is, short sales are complicated. In fact, they’re downright excruciating.

Regardless what ‘experts’ say about short sales being painted in bad light or about it being overly criticized for its inherent complexity as compared to more straight forward investing methods such as wholesaling and rehabbing, and that short sales are actually a lot less complicated than most people think of it, fact remains that doing short sales is something that you can learn in the fly and apply in a specific and relatively fixed 1-2-3 procedure.

Let me show you what I mean.

Listed below is a ‘short list’ of the steps involved in doing short sales. But before that, let me make a disclaimer. These steps are not all inclusive in the sense that these may vary greatly depending on the property, the state, the lender, the level of distress that the homeowner is in and a whole bunch of other factors that play into the short sale deal negotiation.

A. Determine the Value of the Property – this can be done by doing an evaluation of sold properties in close proximity to the house in question within the last 6 to 12 months. A licensed realtor who’s got access to the MLS (Multiple Listing Service) can do a Comparative Market Analysis (CMA) to determine this. However, investors would have to find a way to do this – which is usually to have realtor they know do it for them.

It does not end there though. Once you determine the Fair Market Value (FMV) of the property by averaging the selling prices of similar properties in the same area, you would also need to determine After Repair Value (ARV). This is the value of the house after repairs have been introduced to the property.

Most of these houses need to have some repairs done on them. Some more than others and some less. It all depends on several factors such as the sense of responsibility of the occupants, integrity of construction, neighborhood, etc.

Indeed, this step calls for a lot of math and analysis. Come up with an inflated estimate and your short sale deal would surely come crashing down like a house of cards. Undervalue the house and you’ll end up digging inside your own pocket to make the deal survive. In short, you would have to very precise in determining the value of the property so as to make the deal work.

B. Figure Out the Lenders Broker Price Opinion (BPO) – this is the main factor by which the lender determines the value of the property. It differs from the FMV in the sense that you determine FMV while the lender comes up with the BPO.

This is one of the trickiest parts of the short sale negotiation process in the sense that your FMV should be as close as possible to the lender’s BPO. Too much of a difference between these two values and you can practically say goodbye to your short sale deal.

Understandably, the lender’s BPO would normally be lower than your FMV. However, you cannot simply rely on this generalization. You have to come up with an FMV as close as possible to the lender’s BPO if you hope to have your short sale approved.

That having been laid out, this is one tough ‘mind-guessing game’.

C. Learn The Loan Types – there are different types of loans available for short sales and each one would have a different effect on your short sale deal.

For example, submitting a short sale with a conventional loan will give rise to a different set of requisites than a short sale submitted with an FHA loan. There’s also the same effect on the BPO as FHA loans don’t require a BPO but a Government Appraisal.

This knowledge will also be important in determining NET offers to be accepted by the lender as they have different minimum acceptable offers for both conventional loans and FHA loans.

It is therefore important that you familiarize yourself with the different requirements that go with different loan types so you don’t end up groping in the dark when push comes to shove.

D. Learn How To Deal With Junior Lien Holders – sometimes when negotiating a short sale, you find out that there’s a second mortgage on the property. Most of the time, you simply relate with the second mortgage holder the same way you do with the original mortgager.

But every so often, the second mortgage holder would have a separate set of requisites.

Remember, you are dealing with a lien holder who’s holding an over-leveraged asset (the house). This makes the plot a whole lot thicker.

This is usually where most investors stop before they totally lose their sanity.

I mean, it’s a lot to have to put up with the original mortgage holder’s demands. Multiply that by two and you’re looking at a prospective cause for investor ‘death-by-short-sale’.

E. Closing – provided you’re hardy enough to have reached the part where your short sale has been approved and that you’re actually going to close on the deal, ask yourself:

How much am I making on this deal? Is it commensurate to the amount of work I put into the deal? Will I be willing to go through another round?

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Again, these steps are not all-inclusive. The steps vary greatly depending on the deal, the lender, the amount owed on the property, the level of distress that the homeowner is in and a lot more.

Now you know why “short sales suck” has developed into quite a cliché among real estate investors.

But, don’t get me wrong.

Short sales in this present economy, is a true gold mine as foreclosures are occurring left and right.

Luckily, a number of firms and companies have begun offering ‘short sales done for you’ services, wherein for a set fee (or a percentage, depending on the merits of the deal), investors simply submit a potential short sale deal to these companies and then they’ll be required to submit certain documents which are readily available through the homeowners themselves and then the third party company does the rest. The investor simply waits for the short sale to be approved and for it to be closed.

Being the number one real estate investing resource site, DoDeals.com has joined the short sale bandwagon by offering its Short Sales Done 4-U Service available to certain membership levels.

Many thanks go out to Cory Boatright whose article written at the DoDeals.com Coaching Corner became the main source of the materials used for this blog post.

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