Can you flip a short sale?

Can you flip a short sale? The short answer is yes; there is a right, legal, and ethical way to flip a short sale and then there is an illegal way. This article will help you to stay out of prison by navigating through the otherwise murky waters of a short sale flip. Put your goggles on and let’s swim through this.

First. What is a flip? In real estate, a flip is when someone purchases a property and either immediately or soon thereafter resells the property to another buyer for profit. This can be done on a wholesale or retail basis. With wholesale, the property is bought and then flipped to another flipper who does the rehab and resells or who keeps the property himself as a rental. A retail flip will be those that are bought, rehabbed, and resold to a retail buyer who intends to live in the property. Wholesale profits are small – typically less than $10,000 net profit. Retail flips are more lucrative. If you buy the property at the right price then the sky is the limit on your profit on the resale.

But the key is to buy the property at the right price and this is where short sales can be a real estate goldmine. A short sale is a property that is upside down and the owner wants to sell. If someone has a $300k mortgage on a house that is worth $200k and wants to sell the property then they can have a new buyer assume their loan (not going to elaborate on this in this post but there are many problems with this -namely that mortgages typically have a due on sale clause which makes assumption by a new buyer a default on the mortgage note) or they can negotiate a discounted payoff on their $300k mortgage which would allow someone to purchase the property at $200k or its current market value. The latter being a short sale.

Now on to finding that house. Let’s say you find a pretty house that has everything a buyer would want. It needs no work and is ready to resell with no rehab. The owner wants to short sell. Sounds perfect right? Um no.

(loud gameshow buzzer sound)

Pretty houses will not be discounted enough by the shorting lender to accommodate a flip. And you should know that everything is backwards on a short sale. What we want are houses with problems, lots and lots of problems (insert Dustin Hoffman’s Rainman voice). If a short sale property needs a new roof, a/c, has wood rot, mold, termites, green swimming pool (I love green swimming pools on a short sale by the way), plumbing/electrical problems, broken windows, and the list goes on and on. Short sales on troubled houses like these are the types that can be flipped for large profits because shorting lenders willingly discount these mortgages to get them off of their books.

This will be part one on a series on this subject. And here’s the teaser for part two: you can invest in these short sale flips with none of your own money and your credit report can be chock full of bad credit – FICO score doesn’t matter – what matters is that the property is purchased at the right price. There’s a saying in real estate that ‘price fixes everything’ – and there’s my cliffhanger for part two.