Assume that "Joe", a home owner, has debt on a house that's greater than the amount for which the property can be sold. In fact, Joe has an unpaid loan balance of $140,000; however, the property will only sell for $120,000.

Naturally, this isn't a great situation for Mary, but it isn't good for the lenders, either. They're losing money! So, the lenders are reluctantly willing to accept less than the total amount due in order to minimize their loss.

So, in this situation, the lender accepts that $125,000 as full payment from an investor or other buyer. This amount is clearly "short" of the full $145,000 payment. And that's where the term "short sale" comes from.

At this point, you may be wondering, "Why in the world would a lender consider a short sale?" Well, there are many reasons often related to "hardship cases"; e.g., the homeowner has permanent injuries; financial insolvency; convictions; job layoffs; military call ups, etc. In such cases, lenders are willing to consider a short sale as part of their "loss mitigation" policy.

But, lenders don't go into business to lose money, so they definitely consider short sales a last resort! Foreclosures can be a better choice for them. So, as an investor, should you consider short sales as a money-making opportunity?

The answer is "Yes," if you're an experienced investor. If you're a beginner, my advice is to stay away until you've gained enough knowledge to work successfully with lenders. If possible, find a mentor to guide you through short sale deals.

It's a fact that you can get some good deals in this market, but short sales are definitely not the ticket to "instant riches" as some gurus claim. Also, they usually don't mention that short sale transactions can be downright difficult to complete (compared to conventional deals). Below, I describe some of the complications you have to deal with.

The Complications of Short Sales Several factors are involved in short sale transactions, and that increases the complications you have to master in order to be successful in this market.

The first factor is the particular loan mitigation policy of the lender and third-party investors. These policies (and the attitudes of the lenders) aren't always easy to deal with. As an investor, you have to both master the details of the policies and master the "politics" of dealing with lenders in the loss mitigation department.

Second is the property's as-is value compared with the as-repaired expenses. You have to do complete due diligence to make sure a short sale purchase will make a profit after the expense of "rehabbing" it.

The third factor concerns approval for short sale. It needs to come from the investor who's actually the owner of the loan. This can lead to more complications as you may need to work with several people involved in the sale of the property.

Factor 4: depending on economic conditions, investors can flood into the market. This increases competition.

So, how can you determine if a short sale is worth pursuing? Here are the general steps to follow in order to make that determination

The General Steps to Follow in a Short Sale Transaction The steps described below occur in a majority of short sale transactions; however, they may vary, depending on your area of the country.

Step 1 Identify potential short sale properties (e.g., contact a listing agent, check the public records, etc.).

Step 2 Understand the lender's loss mitigation policy. For example, if they deal with short sales on a fairly regular basis, they're a good choice. If, on the other hand, they seldom or never accept short sale offers, don't waste your time.

Step 3 Determine the number of liens recorded against the property and the total amount of money in those liens.

Step 4 Determine the borrower's present financial condition.

Step 5 Analyze the type of loan that's in default and its current status.

Step 6 Determine both the property's as-is market value and its as-repaired value.

Step 7 Analyze current real estate market conditions.

Specific Steps to Take In a Short Step Situation Once you determine a short sale is worth pursuing, then you'll need to take additional steps.

* Contact the homeowner and analyze their financial condition. * Do due diligence on the property's condition. * If your analysis determines that both the financial and property condition are suitable, ask the homeowner to give you written authorization to contact the lender's loan loss mitigation department. * Contact the decision-maker in the loan loss-mitigation department of the lender and give him or her with a copy of the authorization signed by the homeowner. * Discuss the short sale and ask him or her to send the appropriate short-sale documents to the homeowner. * Instruct the homeowner to gather all documentation in order to prove financial hardship. * Get repair cost estimates from a minimum of three licensed home improvement contractors. * Determine the value of three similar neighborhood properties sold in the last six months (a comparable value study). * Return the short sale proposal to the lender's decision-maker. It should include a signed purchase agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30% less, etc. * At this point, the lender's decision-maker reviews your proposal and orders a BPO ("broker's price opinion") to determine the property's as-is and as-repaired values. The BPO is normally a realtor giving his or her opinion on the property. You'll want to meet with this realtor and influence his or her opinion as much as possible. It's perhaps the most critical aspect of getting a short sale offer accepted and closing the deal! * The decision-maker accepts your proposal or rejects it. * If the decision-maker believes a short sale is appropriate, he or she makes a counteroffer. * You accept or reject the counteroffer. * In the event you accept the counteroffer, you close on the transaction within 30 days.

Additional Points Always remember that all short sales are cash transactions; therefore, you'll need to have cash on hand and verifiable proof that you have that money. If you don't, lenders will not do business with you.

Keep in mind that short sales can't be made to relatives, family members, or close friends of the homeowner. If a lender finds out after the sale that, say, the homeowner's sister bought the property, then that lender can sue to have the sale overturned.

Key Point: Short sale transactions are not for amateurs; be fully knowledgeable, experienced, and professional before approaching the loss-mitigation departments of lenders in this market.