Can You Wholesale a Short Sale? What to Know

Real estate wholesaling and short sales are distinct investment strategies. This article explores the complexities and practicalities of combining wholesaling with a short sale, offering general information for those considering this specialized real estate endeavor.

Defining Wholesaling and Short Sales

Real estate wholesaling is a short-term investment strategy where a wholesaler contracts to purchase a property and then assigns that contract to an end buyer for a fee. The wholesaler acts as a middleman, profiting from the difference between the contracted price and the price the end buyer pays for the contract, often without taking ownership. This process involves finding distressed properties below market value and quickly transferring purchase rights. Key terms include an “assignable contract,” which allows the original buyer to transfer their rights and obligations, and a “cash buyer,” who can close deals quickly.

Conversely, a short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance, with lender approval. This typically happens when a homeowner faces financial distress, like inability to make mortgage payments, and the property’s value has declined below the loan amount. The lender must approve the sale, as they accept a loss, and all proceeds go directly to them. While a short sale helps homeowners avoid foreclosure, it requires a lengthy approval process as the lender evaluates financial hardship and property value.

The Feasibility and Unique Challenges

Combining wholesaling with a short sale introduces complexities due to the nature of short sale transactions. The mortgage lender, not the homeowner, is the primary decision-maker, approving all sale terms, including the purchase price and final buyer. This creates hurdles for a wholesaler attempting to assign a contract. Lenders often include “arm’s length transaction” clauses, which prohibit pre-existing familial or business relationships between buyer and seller to prevent fraud. This conflicts with wholesaling practices, where a wholesaler might be seen as having a business relationship with the seller or profiting without full transparency to the lender.

Lenders may also have specific approval criteria for the final buyer, which might not align with a wholesaler’s network of cash investors. They often require an affidavit confirming the arm’s length nature of the transaction, ensuring no hidden dealings or understandings exist between parties. Extended timelines in short sales, ranging from weeks to months for lender approval, challenge wholesalers who seek quick transactions. The uncertainty of lender approval, coupled with homeowners changing their minds, can lead to deals falling through after significant effort.

Executing a Wholesale Short Sale

Executing a wholesale short sale requires a nuanced approach, acknowledging lender involvement. Identifying potential short sale properties often involves looking for pre-foreclosure listings or direct outreach to distressed homeowners. When contracting with a seller, clearly explain the short sale process and the wholesaler’s role, ensuring the seller understands that ultimate approval rests with their lender.

Submitting an offer to the lender requires a comprehensive package, including the homeowner’s financial documentation and a hardship letter detailing their inability to make mortgage payments. The offer should appeal to the lender, facilitating either an assignment or a double closing, and be competitive enough to secure approval. The lender’s primary goal is to mitigate losses, so the offer must reflect a market-supported sales price.

Securing an end buyer is a continuous process, ideally beginning before full lender approval. This allows the wholesaler to move swiftly once conditional approval is in place, vetting buyers who meet specific lender qualifications. For closing, two primary strategies exist: assignment of contract or a double closing. While an assignment transfers the wholesaler’s contractual rights to the end buyer for a fee, lenders in short sales often restrict assignments due to arm’s length requirements and anti-assignment clauses.

A double closing, where the wholesaler first purchases the property from the seller and then immediately sells it to the end buyer, can be a more viable short sale option. This method satisfies the lender’s arm’s length requirements, as the wholesaler temporarily takes ownership, creating two distinct transactions. However, this strategy requires the wholesaler to have access to funds for the initial purchase, even if for a short period, and involves two sets of closing costs. Some short sale transactions may also include deed restrictions preventing immediate resale for profit, impacting the viability of a double close.

Essential Considerations for Success

Success in wholesaling a short sale depends on several factors. Adherence to legal and ethical compliance is important, as real estate laws, including licensing requirements for wholesalers, vary by jurisdiction. Thorough disclosure to all parties—the seller, lender, and end buyer—is both an ethical and legal necessity, ensuring transparency throughout the transaction.

Collaborating with experienced professionals helps navigate short sale intricacies. A real estate attorney specializing in these transactions can provide guidance, from negotiating with lenders and reviewing complex paperwork to ensuring legal compliance. These professionals can also help address potential issues like deficiency judgments, where the seller might remain liable for the difference between the sale price and the outstanding mortgage balance.

Financial preparedness is important, especially if a double closing strategy is employed. This requires the wholesaler to have capital for the initial purchase, covering earnest money deposits and potential transactional costs, even if for a brief period. While the end buyer typically covers many closing costs, the wholesaler may incur certain fees in a double closing. Conducting thorough due diligence on the property, understanding the seller’s financial situation, and researching the lender’s policies are key steps to assess deal viability. This includes understanding market conditions and potential changes in property values.

Managing inherent risks is essential. Lengthy timelines, the possibility of lender denial even after significant effort, and the potential for losing time and resources without a successful closing necessitate a cautious approach. Building a network of cash buyers can help mitigate the risk of not finding an end buyer, a common challenge in wholesaling.