At this very moment, millions of homeowners are late with at least one mortgage payment. Several million of those will miss even more payments and will receive official Notices of Default. A high percentage of those will continue past default, and the homes will be repossessed by the bank, which puts the home up for foreclosure auction.
2010 was rough, with 2.87 million homes in various states of pre- and post-foreclosure. 2011 appears to be 20 percent worse than 2010, likely taking us to a peak in foreclosures and a bottoming out in pricing [source: Levy and Gopal].
If there's a bright side to this dim outlook, it's the huge volume of investment opportunities available to real estate buyers. And, happily enough, one of the best investment arrangements for savvy investors can simultaneously save at-risk homeowners from worst-case scenarios. This pre-foreclosure tactic is called the short sale.
A short sale is accomplished when a bank accepts an offer lower than the amount actually owed by the homeowner. This pre-foreclosure strategy can earn investors a lot more money, rescue foreclosure-bound homeowners before the foreclosure goes on their credit reports and help banks avoid dreaded property ownership.
Before you consider purchasing a short sale property, read on for some tips.
Consider Taking a Class
Real estate market watchers know there's an overturned hourglass ticking off the time until the market stabilizes: when great pre-foreclosure deals dissipate. There are only so many deals that can be done in that shrinking amount of time. Also, an investor must move quickly to seal a pre-foreclosure deal successfully, and the investor may have to move even faster if short sale is the goal.
Panicky types may offer proposals to every short sale candidate they can find, trying to work fast. But work smart, or you'll end up doing a whole lot of wheeling and dealing with zero properties to show when the hourglass runs out.
Pulling off the successful short sale is an art and requires skills not needed in other real estate investing scenarios. You'll need to know a few things:
- How to meet the needs of the homeowner and the lender
- Good presentation skills
- Smart market and property assessment capabilities
- How to move fast in order to create opportunities during what's typically a short window of time
You may save yourself a lot of time and avoid some critical errors by taking a class on the subject before making your first offer. Many real estate education companies offer courses, and you can often find such courses online and take them from the comfort of your own home.
Working smarter is equivalent to working faster: You'll save yourself mistakes that eat up valuable and irreplaceable time.
Identify Short Sale Candidates
The first step in the short sale investment process is identifying a property that's headed for auction. It should be property that the homeowner prefers not to lose but can't retain, and that the bank would prefer not to own.
So, the ideal homeowner can't find a way out of foreclosure, and the bank most open to a short sale doesn't want additions to its growing pile of real estate-owned (REO) money pits. Add to this mix a house in which the amount owed to the bank and the property's value present sufficient wiggle room for you to propose a price lower than is actually owed, and you may have found a perfect short sale candidate.
But how do you locate such homes?
Real-estate listings don't always state when a property is subject to foreclosure (although sometimes you can spot terms such as "pre-foreclosure," "subject to bank approval," "notice of default," "headed to auction" and "give bank time to respond") [source: All About Real Estate Short Sales].
A more direct route to identifying foreclosure-bound properties is official notices, such as those published in the legal sections of newspapers. You can read notices as they're published or go straight to the county courthouse for the freshest filings. Identifying properties in the first days they become short sale candidates saves the investor valuable time that could make the difference in whether a deal sails or fails.
Keep in mind that the short sale is a bit of a crapshoot. Lenders might reject your short sale application for any reason or no reason at all. Other property proposals may take priority, the price may be too low or the wrong person may go on vacation at the wrong time.
When your application is submitted, you may have a bit of a wait until you hear whether or not your proposal is approved. Once you get the call that your bid is accepted, though, you need to jump into action and make sure you'll be financially prepared in time for the closing.
Many banks will give you 30 days to get your financing together, but some won't give you nearly that. You need to be prepared in case that deadline is sooner rather than later. So if you don't have the full amount in cash on hand, then try to get qualified for the loan before the short sale approval actually comes through. This way you have a better chance of meeting tight sale deadlines.
Don't Get Caught by Expensive Surprises
A successful short sale could mean you're getting an amazing deal and paying far less on a piece of property than it's worth, and everybody else is walking away happier for your participation, as well. Be very certain about what you're purchasing, though, as hidden costs could eat very quickly into your perceived profit.
First and foremost, do a thorough title search before making an offer on any pre-foreclosure property. There may be debt attached to the property that you'll be obligated to pay, including any liens and associated fines, late association fees, older mortgages and even late utilities. Be sure you do a thorough inspection of the exterior and interior to know what repair expenses you're likely to pay to make the home habitable. Also, find out if any home improvements are subject to city approval. If a certificate of occupancy was either not filed after an improvement or was rejected, you'll adopt those obligations.
A number of these unexpected expenses could completely wipe out any profit you can expect from a short sale, so be sure to do your homework.
Assessing Real Estate Agents
Short sale investors sometimes encounter go-between real estate agents as they try to negotiate short sales. An agent representing the homeowner can be a good addition to the team or a total hindrance.
Short sale-savvy investors often complain about agents who have a listing but who don't understand the process and advantages of short sales, and won't even take the proposal to the client. Since time is of the essence, most short sale professionals recommend that, if an agent thinks your short sale offer is too low but you know it to be in line with the neighborhood and what is owed on the property, you just walk away and find another property with a more receptive agent.
Short sale experts will also tell you about advantages of real estate agents who specialize in foreclosures. These agents will be well-versed in the art of the short sale proposal and can become your biggest allies.
You can further enlist short sale-savvy agents by having them keep an eye out for new listings for you. This would help you begin the process with appealing properties as early as possible. An experienced agent can also guide you through the process.
For more information, check out the links on the next page.
If you own a home, you most likely have homeowners insurance, but how sure are you about what is and isn't covered? HowStuffWorks takes a look.
- All About Real Estate Short Sales. "Strategies for Locating Short Sales." (Feb. 27, 2011) http://www.realestateshortsale.net/buying-short-sale/short-sale-strategies.html
- Cunningham, Barry. "Buying A Short Sale For Maximum Profit With The Help Of A Realtor." Real Estate Radio USA. March 14, 2010. (Feb. 27, 2011)http://www.realestateradiousa.com/2010/03/14/buying-a-short-sale/
- Evans, Mariwyn. "Sold up short: How to Succeed at Short Sales." REALTOR Magazine Online. (March 8, 2011)http://www.realtor.org/archives/feat1200706
- Foreclosure.com. "Real Estate Short Sales." (March 2, 2011)http://www.foreclosure.com/shortsales.html
- Information-Valley.com. "Working Default Listings." 2005. (Feb. 27, 2011)http://www.information-valley.com/defaultListings.html
- Lansner, Jonathan and Jeff Collins. "Realtors: 43% of 'short sales' fail to close." The Orange County Register. March 8, 2011. (Feb. 26, 2011)http://lansner.ocregister.com/2011/03/08/realtors-43-of-short-sales-fail-to-close/102221/
- Levy, Dan and Prashant Gopal. "Foreclosure Filings in U.S. May Jump 20% From Record 2010 as Crisis Peaks." Bloomberg. Jan. 13, 2011. (Feb. 26, 2011)http://www.bloomberg.com/news/2011-01-13/u-s-foreclosure-filings-may-jump-20-this-year-as-crisis-peaks.html
- Michigan's Compassionate Foreclosure Solutions. "Realtors Get Help for Homeowner Short Sales." (Feb. 26, 2011).http://www.miforeclosurerelief.com/realtors-helping-homeowners-get-help-with-short-sales/
- RealtyU. "Short Sale: Certified Short-Sale Professional (CSP)." (Feb. 27, 2011)http://www.realtyu.com/short_sale_class.htm