At the time of writing this, home values are dropping, investors are running scared, foreclosures are at all time highs and climbing daily. Homeowners are feeling the pressure because of the weakening housing market, especially those who have mortgaged their property to the max. They have no equity in their homes and are behind on big loan payments. Most investors don't even touch these deals because there is no money to be made with them (so they think). This is where short sales come in. Short sales are a must if you want to be successful in the current real estate market. Investors doing short sales are making staggering profits of $20,000, $40,000, even upwards of $60,000 per deal right now!
So, What Exactly Is A Short Sale Anyway?
A short sale (also known as a short payoff) is a sale in which a mortgage holder agrees to accept less than what is owed on the existing mortgage to avoid foreclosure. However, just because an investor submits a few documents to a lender and asks for a discount does not mean they will get it. Banks hate to lose money and will never accept a discount on a property just because some ambitious investor asks them to. The investor must be able to build a case for a discount. Building a case requires being able to identify and document any damage to the residence, proving the homeowners insolvency and pulling good comparables to support their offer.
Why Are Banks Willing To Do Short Sales?
Banks will do this for several reasons. Lenders are in the business of lending money, not owning homes. A foreclosed home-especially one that cannot be sold at a public auction. Lenders know they could lose a lot of money with all the costs associated with the foreclosure process – attorney fees, damages to the property, eviction process, delays from the borrower filing bankruptcy and all the cost associated with a resale. Lenders want to avoid a foreclosure auction or bankruptcy at all costs. When a bank forecloses on a home, it becomes a non-performing loan on their books. This affects the amount of money a bank can borrow from the Federal Reserve, ultimately affecting their bottom line profits.
If an investor's short sale offer is economically more feasible than the costs associated with foreclosing, then the lender is more likely to accept the offer. It all comes down to dollars and cents. Banks do not care a borrower's spouse has suddenly grown ill and cannot work nor do they care if a borrower's husband is divorcing her for his secretary, thus leaving her with the financial responsibility of caring for the house. They definitely do not care about saving the credit rating of a borrower. The banks only motivation for accepting a short sale is cutting their losses. They would rather cut their losses and get less money now than dealing with the headaches of going to auction plain and simple. The best time to consider doing a short sale is in the pre-foreclosure stage. Find homeowners who are more than three months behind on their mortgage payments with a notice of default.
It is best to perform short sales on distressed properties that are in need of repairs or updates. When a bank forecloses on a property, the home is eventually assigned to a realtor for resale as an REO (real estate owned/bank owned property). It must then compete with the thousands of other homes on market in its class. In spite of what the bank loss mitigation departments may tell you, lenders do not have a list of eager buyers fighting one another to buy their properties. Many foreclosed homes never receive bids at the sheriff auctions. Therefore, if the home is distressed or in need of extensive repairs or updates, the bank knows the property will be a tough resell on the market and are usually inclined to take what they can get from the short sales investor and get rid of the property.
It is important to create a win-win situation for everyone involved. The banks are happy because they recouped some money, and kept a non-performing loan off their accounting books. The homeowner avoids foreclosure, and saves their credit while you are left with instant equity in the house to make a nice profit when you sell the property if you decide to do so.
Who Are Good Candidates For Short Sales?
A good candidate for a short sale is a borrower who can no longer afford their monthly payments or someone whose mortgage is upside down, meaning what is owed far exceeds the current value of the home. Negotiating a successful short sale gives you the satisfaction from knowing you saved a homeowner from having an ugly foreclosure blemish on their credit report. Contrary to popular belief, not every homeowner in pre-foreclosure wants to keep their home and welcomes anyone who can release the heavy burden of mortgage payments while allowing them to maintain their credit score.
Be wary of uncooperative homeowners who hold on to the dream of one day keeping their home. These candidates make for a long and arduous short sale process. To complete a successful short sale transaction, the investor must have full cooperation from the homeowner. Homeowners who resist your efforts should be avoided.
Homeowners who have houses that are over leveraged with second mortgages also make great candidates for a short sale. When a house goes to auction the second mortgage holders' note is usually wiped out. These lenders are very motivated to negotiate a short sale to insure that they get something rather than nothing at all. If you were in their shoes, wouldn't you rather recoup something rather than nothing? The second mortgage holder usually gets between 5-10% as full payment for the second loan. It doesn't always happen like this, but on average that's what they may accept instead of getting nothing at all if the home goes to auction.
Doing $1 Deals With Short Sales
Let me guess. You must be wondering if you can also make deals with the bank with $1 doing short sales. Absolutely!! Short sales are the new method for creating instant equity in properties. With the number of foreclosures on the rise, the opportunities for investors to make money are everywhere and will only increase in the coming years. The short sale process allows the investor to discount the retail purchase price of a home by simply submitting a few documents to the lender and working out a compromise with a bank loss mitigation negotiator.
Doing $1 deals when buying pre-foreclosure homes is no different than buying any other type of distressed properties. However, it is important that you are more sensitive and understanding to the homeowners' situation than at other times. In cases like these, the seller may feel distraught and embarrassed.