Although I have often said that a short sale is a long buy there is a lot of money to be made in doing short sales. If it is what you want to focus on then I am sure that you will become successful. At some point, you will come across a seller that owes close to or more than the property is worth and is behind in their payments. In this situation, lenders are sometimes willing to accept less than the full amount due.
If you are successful in negotiating a deal with the lender, you will have just executed a "SHORT SALE". Your first step would be to obtain written authorization from the borrower (seller) to contact the lender and discuss the mortgage and obtain loan information. Next, contact the "LOSS MITIGATION" department. Negotiating a short sale with the lender is a difficult process, generally because it is an extremely difficult job to find a bank officer who has the authority to accept a discount. It's possible that the bank you call may have a different name for the department but be patient and explain to whoever you talk to what information you need to proceed. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around to several automated voice mail systems. Once you get in touch with the right person, then the negotiating begins. To save yourself time in the future, make sure to get this person's direct telephone number and other contact information.
From the lender's perspective, a short sale saves them a lot of money due to the extra costs and employee burdens associated with the foreclosure process, such as attorney fees, the eviction process, delays from the borrower's bankruptcy, damage to the property, costs associated with resale, etc. Your job as the investor is to convince the lender that they will fare better by accepting your offer now and cutting their losses as quickly as possible. The lender will have to have every detail of the deal between you and the borrower (seller). Specifically, the lender wants to know what the property is worth.
The lender will generally hire a local real estate broker or appraiser to evaluate the property. You can also submit your own appraisal or comparable sales information. You will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood, with pictures of the closest rundown properties in the neighborhood as you can find. You should also include a contractor's bid for repair estimates, which should be the highest bid you can obtain!!
Remember, pictures can speak volumes! The lender will also ask for financial information on the borrower (seller). A loan application in reverse, if you will. The borrower (seller) must prove that he is in dire financial straits and unable to afford the payments. The borrower (seller) must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more, paperwork than the original mortgage application. The borrower (seller) should submit a "hardship letter", which is basically a sob story about how much financial trouble he is in. This may require a little literary creativity and help on your part. Don't lie! Just paint a picture that doesn't look good.
Finally, the lender generally wants to see a written contract between you and the borrower (seller). The lender wants to make sure that the borrower (seller) isn't walking away from the deal with any cash in their pockets. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the "net cash" to the borrower (seller) is the exact amount of the short sale amount to the lender.
A preliminary HUD-1 settlement statement is often requested, which can be difficult, since so many title and escrow companies won't prepare one in advance of closing. As an alternative, you could prepare your own HUD-1 statement and write "preliminary" across the top of it. Don't be surprised if your short sale bid is rejected at first. Lenders aren't emotionally attached to their properties; so they aren't as likely to give you the "deal of the century". Many short sales fall through for different reasons but mainly because a Brokers Price Opinion (BPO) comes in too high.
You can't pull the wool over a lender's eyes. If the property isn't in need of serious repairs, it is highly unlikely that you will be able to convince the lender that the property is worth a lot less than the appraised value.