Real Estate Investing: Short Sales Explained

I always start off every interview asking the speaker to speak temporarily about there meticulous area of knowledge. Below is Graham's answer to what a short sale is and why banks accept short sales.


“We'll go over the numbers, Ross. A short sale is attractive simple. If you have a property that's worth $523,000 and let's say it has a first credit for $300,000 and a second mortgage for $55,000-what that means is the total liability on that property, or the total mortgages, is $260,000. Being a real estate shareholder, I wouldn't want to buy a $225,000 house for $220,000. It doesn't make intellect.

A short sale is when you get the bank to not take $550,000, you get them to take less, like $360,000. The banks are going to do this for quite a few reasons. First, they're going to have a lot of operating expense that are related with a foreclosure. They're going to have realtor's costs, foreclosure costs, holding costs, repair costs-they're going to have all sorts of fees linked with a foreclosure.

Unavoidably, the bank is only going to recoup somewhere around 70% of the value of the property. That's why banks will take short sales on foreclosures. The natural follow-up to that is, “Why are foreclosures such a hot service right now, and why is there a lot of drone about them?” There are several reasons to that too, and it's really scaring the banks right now.