What is a Short Sale?
A short sale is when a lender accepts
a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy.
Instead of buying from a seller, you are
purchasing the property directly from the lender for a discount. For example:
A homeowner, who is facing foreclosure, has an existing first mortgage of
$300,000. You write an offer to the lender for $220,000, which is accepted
as full payment for the loan. This is a short sale. Why are they willing
to take such a discount? Several reasons. First of all, banks do not like
excess inventory and bad loans on their books; therefore, if they see an
opportunity where they can sell the property without a huge loss, they will
do it. Secondly, lenders know they could lose a lot more money if the property
goes to auction. There are so many fees involved if the property goes to
auction, that they would be better off taking the discount beforehand and
be finished with the headache of it all.
At the time of this writing, foreclosures are at an all time high, which
basically translates into more opportunities for you. Since foreclosures
are increasing,
this is the perfect time to jump into this because there will be more and more
lenders discounting properties. It is safe to say that most lenders will accept
a short sale, however, you may come across one or two lenders who will not
discount. If the numbers work out for the lender they will do it.
It is best to do a short sale when the property is in the pre-foreclosure state.
Yes, you can perform a short sale when the bank owns the property, however
your profits will more than likely be smaller. There are two stages within
pre-foreclosure. The first stage being those individuals who are behind on
payments and the second stage are those who are behind on payments with a notice
of default. In order for this to work properly and for you to successfully
get a short sale, you must find the homeowners who are in the second stage
of pre-foreclosure or more than 3 payments behind on their mortgage. Once the
notice of default has been recorded, banks become motivated as well, so you
are more likely to get a discount. Until that time, very rarely will a bank
ever discount a mortgage that soon. Why would they? The homeowners still have
time to cure the loan and make up the back payments.
It does not matter what type of house or condition it's in, all mortgages can
be discounted. The best properties to perform a short sale on are the houses
that need lots of work and repairs because lenders will give you a bigger discount
if they see they are "don't wanters". Properties that are over leveraged
are also prime candidates. Most rookie investors who see a house over leveraged
with an upside-down mortgage may think there is no hope for this property.
On the other hand, this is a sweet deal to the savvy investor. Properties with
large 2nd mortgages are also treated as gold because the 2nd mortgage is wiped
out at the foreclosure auction. Lenders with a 2nd and 3rd mortgage position
would rather have something than nothing.
3 Stages of Buying Foreclosures
The strategy of buying pre-foreclosures is to create a situation where everyone
wins. This type of strategy involves just you, the homeowner, and in some cases
the lender. Because the homeowner has been delinquent on his or her mortgage
payments, they are now in a position to entertain offers made by investors.
Keep in mind, you may not be the only investor looking at this property. However,
when buying pre-foreclosures, you can expect very little competition.
When buying pre-foreclosures like this and in turn make a profit, you must
do some research on these types of properties. The following are some basic
guidelines:
1. locate loans in default,
2. evaluate each property by comparing and contrasting location, price, and
property condition
3. narrow your selections to a few
4. inspect the properties
5. determine the property owner's needs, his motivation and flexibility
6. determine the market value of the property, fix-up costs, potential sales
price and profits
7. arrange default work out by negotiating with the owner and the lender
8. close on the property, fix it up, and flip it quickly
Buying Foreclosures At The Auction
Buying foreclosures at the auction is a great way to purchase a property under
market value. Most properties are auctioned on the courthouse steps. The property
is auctioned off to the public and the highest bidder walks away with the property.
This can be very rewarding to those who are in a position to buy the property
within a short amount of time and can be devastating to those who bid without
proper financing in place. Most auctions require a small deposit down of the
purchase price on the spot and the remaining balance usually within 1-30 days.
So make sure You have you deposit ready and your financing is in order before
you bid. If you are unable to get financing within the allotted time, you will
most likely lose your down payment, and they will auction the property off
again. Buying foreclosures at the auction is also the riskiest place to pick
up a foreclosure. You are buying the property in "As Is" condition
so it's very important to do your homework before you just go to an auction
and bid on a property.
When buying foreclosures at the auction, we recommend you:
1. first visit a local auction to get a feel for the bidding procedure, find
out how much is required as a down payment and when the rest is due
2. get proper financing in order
3. research properties and do your homework prior to the auction date
4. calculate potential profits
5. determine the most you will bid for the property
6. follow the property to the auction and participate
Buying Foreclosures that are Real Estate Owned (REO)
Buying foreclosures that are REO primarily involves the lender. REO just means
the lender reclaims the property and establishes control over it to minimize
its losses. Buying foreclosures that are REO is by far the easiest way to pick
up a distressed property. Lender's are always listing properties that come
back from the auction, because they don't like excess inventory. They are in
the lending business, therefore it is quite easy to find these types of properties.
Most of the time they will hire a broker or real estate agent to handle the
REO's just because there are so many of them. Lender's in this situation are
very motivated, especially if they have a large number of them. These properties
are considered to be a huge expense which need to be eliminated. This gives
the investor numerous ways to creatively negotiate with the lender on a purchase
price. One disadvantage when buying foreclosures that are REO, is that you
will pay close to market value for these properties because the lenders will
have paid off any outstanding liens, taxes, and other expenses. This is good
for you though, because most of the time you will find these types of foreclosures
with clear titles.
For professional advice on all aspects of buying and selling real estate call Juniper Realty, 781-769-4818 or email us at juniperrealty@aol.com