When I first started investing in short sales, I had one basic strategy. I would tie the property up with a 1-year option contract that gave me the right to market and re-sell to a 3rd party, and I would then list it on the MLS to find an end buyer who would pay more for the property than I was purchasing it for. After coming to an acceptable agreement with the short sale lender, I would do a back-to-back closing using transactional funding, and pocket the difference between the two sales. My average profit on each flip was somewhere in the neighborhood of $7,000-$10,000.
That was a VERY successful strategy for me, and not only helped me survive the real estate crash, but actually helped me build up a substantial little war chest to begin funding my own deals (without transaction funding) AND start acting as a transactional funder myself for other investors in my area. It wasn’t until the market stabilized, and prices begin to increase, that I began to see how short sales could be an incredible lead source for renovation properties…and with MUCH larger paychecks than just same day flips.
The first short sale deal that I converted into a traditional “fix & flip” property was located in a little patio home community on the North side of town, that is known for elderly residents, which of course means….CASH BUYERS. The property was owned by an elderly couple in their 90’s, who had since moved to Mississippi and could no longer afford the home. We started out with the same old process we had always used, and tied up a $95,000 cash buyer to flip it to, while we negotiated an offer in the $70k’s with the bank.
At some point in the process, the buyers went back to the property to walk through it, and felt like it was just too much work for them to take on and decided to back out of the contract. Typically, we would have just re-listed it back on the MLS, and waited for another buyer. However, by this time I was hot and heavy back into the renovation game, and this one was a perfect fit for a fix & flip. The average days on market in the neighborhood was less than 30 days, while the rest of the area was still over 150 days, and so I knew this would be a home run.
We ended up settling with the lender to purchase the home for $72,500 (on a balance of $150k) plus we had to pay off a junior lien of $3,000, so we were into the home for just over $75,000. After about $18,000 in repairs, we turned around and sold the property for $129,900 (full price offer) after just ONE DAY on the market. After closing costs, holding costs, and real estate fee, we made a profit of $25,038.47. Not bad for a couple months worth of work!
This deal marked an epiphany for my business, as our strategy changed permanently to no longer viewing short sales as only a same-day flip strategy, but rather as a stream of steady deals for our renovation business. We no longer even pursue an end buyer for a traditional A-B-C short sale flip until we see if we can make the numbers work as a renovation, and the success of this paradigm shift has been remarkable. Our last 5 or 6 renovations have come directly from short sale leads, and we are closing on another short sale deal this Friday. You can expect to see that one added to our list of “Success Stories” in a few months!
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