The Basics Of Buying And Selling Short Sales As Well As Foreclosures

As I mentioned yesterday, not all homes that go into default go all the way through the foreclosure process. Many are sold before the notice of default is completed. Short sales and foreclosures are attractive to buyers and investors because the price is usually significantly below market value.

Sellers in foreclosure tend to ignore the problem...kind of like the "Ostrich" approach...bury their head in the sand. However, there are options...
1.] Forbearance, a short term option whereby the lender allows the borrower to not pay for typically three months, giving the borrower some time to get their finances in order.
2.] Loan modification, where the terms of the existing loan are modified to accommodate more favorable payment terms for the borrower, thus allowing them to remain in their home. These can be any or all of the following; decrease interest rate, extending the length of the loan, forgiveness of negative equity, to name just a few options.
3.] Sell short. This where the home is for sale and the selling price is lower than the total loan amount. The seller negotiates with the lender(s) to forgive the difference between the market/sales price and the what is owed.
4.] Foreclosure; where the homeowner stops paying and allows the bank to re-posses it. Whether it is a short sale or a foreclosure, there will be "debt forgiveness" involved. When this happens, there can be tax ramifications as the IRS may consider this "Taxable Income" under the law. You should always seek out the advise of a qualified tax professional prior to making these choices.

Not all short sales or foreclosures are a wise investment. For the buyer...it is important to understand that to pull a house out of foreclosure, the buyer usually has to make all payments current, pay all imposed fees as well as refinance the property. It is rare that a loan is assumable in this type of situation.

When purchasing real estate that is distressed, it will be done one of three ways; purchase from the seller in foreclosure, negotiating the purchase of a short sale, or purchasing the property from the bank after the foreclosure process is complete.

Purchasing real estate that is being sold "Short" is a challenging and lengthy process at best. It can be significantly more challenging than a foreclosure due to a number of reasons such as...
1.] You must negotiate the deal with the seller.
2.] You must negotiate with the bank(s) Most often there will be a first and a second note against the property. You must negotiate with each lender separately. One or both have the option of rejecting the proposal. This is a time consuming project. It is often emotionally exhausting for the buyer. Response times are drawn out as lenders are usually overloaded in the loss mitigation department. Frequently, there are multiple offers pending on the property that also contribute to the lengthy process.

Before the real estate goes to public auction, the property may be purchased out of foreclosure. Buyers can also bid on the property at the auction. It is important that buyers get as much information on the property prior to entertaining the option to bid. Typically, the buyer must provide some sort of cash deposit prior to participating in the auction process. It is important to review the terms of the auction, prior to bidding, to insure that you do not put yourself in a position of weakness. Do your due diligence...know the market prior to participating in the auction process. Be confident that your target price will be below market value. Have your bidding limit dollar figure in mind for each piece of property. Finally, do not let emotion play into purchasing these types of property. It is always about the "number".

Key notes for investors; Always know your market. Know your fix up costs...what will it take to get the property in shape? What rents can you command? Do you really feel that over a period of time there will be enough capitol appreciation, that you can be profitable at the point of sale?

My next post will delve into more aspects of "Selling Short" Until then...