Buying foreclosures can be extremely profitable for real estate investors. However, most of these homeowners are mortgaged to the hilt. They have no equity, and big loan payments. In fact, many actually owe more than the property is worth!

Most investors will walk away from these deals because they see no obvious profit. However, you can create your own equity by negotiating a Short Sale with the bank or lender.

What is a Short Sale?

The concept behind the short sale is simple: your goal as a real estate investor is to convince the bank to sell for less that is owed as payment in full. Of course, this concept is easy - buy the foreclosure from the bank at a big discount, sell the real estate, and make money!

How to Negotiate the Short Sale with the Mortgage Holder

Once you have your secured a contract with the homeowner and have your paperwork in order, you'll be ready to deal with the loss mitigation department of the bank. Short Sales success relies on dealing with the loss mitigation department at the bank. Although most lenders look at short sales as a necessary evil within the lending industry, that doesn't mean that the bank will just roll over and do your bidding.

Understand the Bank's Perspective

With foreclosures at a 52-year high, the loss mitigation department at the bank is busy, if not highly overworked. Turn this disadvantage into an advantage - sell them the benefits of your short sale.

Short sales contracts help lenders unload unwanted property and spare many expenses associated with the foreclosure process. These expenses include, but are not limited to, court costs, bankruptcies, repairs and marketing. This is in addition to the $300,000 to $800,000 (or more!) normally held in reserve by lenders. Federal regulations require this reserve, which is usually many times over the actual price of the bad debt.

As the investor, keep these benefits at the top of your mind. After all, it's up to you to convince the lender that cutting their losses short is the best option.

It's time to hone your negotiating skills. Here are 3 Steps to help you out.

Step 1: Have Your Paperwork Ready

There is paperwork that all lenders will require in order for you to submit your offer for the short sale. Second, many of the larger institutional lenders have their own short sale package (their own forms to be filled out and signed).

Since many of these forms have to be signed by the homeowner(s), it's best to have them with you when you meet with the homeowner to work out a deal. At a minimum you should have the homeowner fill out and/or sign:

Authorization to Release Information (homeowner's permission for the bank to speak to you)

Purchase and Sale Agreement

Hardship letter (showing why the homeowner can't make the mortgage payments)

Financial statement (showing the assets, liabilities, incomes & expenses)

Estimated HUD1 or Net sheet (showing the bank what they will get)

Second, find out if the lender has a package they want completed. You can do this usually by calling the lender and asking them to fax you the package. Get the lender information from the homeowner in a phone call, so you can get the package before you go out to the house.

Step 2: Approaching the Loss Mitigation Department:

One of the first challenges you'll face with the bank is getting your call to the right person. Some banks have systems set up in a way that when you call put in the homeowner's account number, the call transfers to the appropriate department.

If the bank doesn't have a system like this, call around to find the Loss Mitigation Department. Many banks have different names for this department, so you may spend some time getting bounced around. Other names to try out are foreclosures department, short sale department, or loan modification departments.

Make sure you introduce yourself and be nice, polite, and patient when you reach the right person. This is the person that can make or break your deal. It's helpful to have some form of a script in front of you to get the conversation.

When you speak with them, make sure you cover the following:

Introduce yourself.

Name the homeowner, the account number, and the fact that you represent them.

Ask for the fax number.

Let them know you're faxing over an authorization to release information so that the loss mitigator can talk to you.

Stay on the phone as you fax this information.

Explain to them that you're interested in a short sale.

Once they have the paperwork in front of them, the negotiations begin.

Step 3: Begin Your Negotiations

Every bank has its own personality and approach when it comes to short sales. Some teach their employees to at least show resistance up front. One reason for this is that many investors call them expressing interest in a short sale, with no clue how to do it! These loss mitigators usually have about 80 to 300 files on their desk. They just don't have the time or desire to teach you! Let them know you don't need them to!

Many new investors have been advised to not reveal that they intend to invest in a property. However, it is better to be upfront and let them know that you are an investor, and you are buying the property. Being honest and upfront allows both parties know what is required of them, and what needs to be negotiated.

While speaking with a loss mitigator, make sure to emphasize the following points:

1. You're an investor and you know what you're doing. Although you do want to make profit, let them know you're not out to steal the property from them.

2. You understand that they are busy and appreciate the valuable time they are spending to negotiate with you. Find out what will make it easier on them.

3. Remember your selling points. The bank wants to avoid the homeowner filing bankrupty, and the bank needs to unload unwanted property without taking a huge loss. (And yes, while you are in it to make a profit, you're not trying to rip them off! You're just trying to use your expertise to do what you're good at.)

4. A short-sale is a win-win situation for everyone!

Once you have spoken to the loss mitigation department and given them your paperwork, the lender will need information about the property, the borrower and the deal that you are proposing. If the person you are speaking with tries to test your resistance, make sure you answer as many questions as thoroughly as possible to let them know you are a professional. Hang in there, answer and ask as many questions as possible, and they'll be more apt help you out along the way and walk you through what it is that you need to do.

The most important fact that the broker needs to know is: How much is the property worth? Banks usually hire a real estate broker or appraiser to evaluate the property. This is called a broker's price opinion or BPO. The BPO is one of the largest hurdles you need to clear when perfecting your short sale negotiations. In the next article, you'll learn the in's and out's of the BPO and how to negotiate the BPO down to create profit for your short sale.