What is a Short Sale and How You can Profit from it?
Very few people had heard of the term short sale even a few months ago. These days you are guaranteed to be looking at short sales if you are in the market to buy. You can greatly profit from short sales if you take the trouble of understanding how the process works.
A short sale is when a lender agrees to sell property at a discount to avoid a possible bankruptcy or foreclosure auction. In most cases banks will sell at a lower price than what is owed on the property. In a short sale you buy the property from the lender at a discount rather than the seller.
For instance a homeowner who has defaulted on his loan has an existing first mortgage of $400,000. You make an offer to the bank to buy the property for $280,000. It will be a short sale If the lender accepts this offer as full payment for the loan.
Why are lenders willing to take a loss? There are several reasons for this. Banks do not like to have bad loans and inventory on their books. They will rather sell the property and take a moderate to small loss. They also realize that if property were to be sold in a mortgagee auction they could lose a lot more money. In addition the banks will also need to pay auctioning fees and there is no guarantee that the property will sell.
At present foreclosures are on a record high. This is the perfect time for you to take advantage of the discounts available. Most banks are like to accept your offer of a short sale if the price is right for them.
Right now we are seeing foreclosures at all time highs. We are seeing home values decrease and properties over-leveraged. There is a huge opportunity right now in Pre-Foreclosures. So why not take advantage of it.
You are solving the banks problem and helping the homeowner avoid foreclosure in the process. The best part is that you don’t need good credit, a lot of money and it’s virtually risk free because you’re just controlling the property long enough to find a buyer.
You can unlock the hidden wealth in pre-foreclosures through this recommended Home Study Program.
The most successful time to do a short sale is when the property is in the pre-foreclosure stage. Your profits will be much smaller once the bank owns the property. You should try to put an offer when the default notice has been served but the bank has not acquired the property . The banks are most motivated at this stage to sell. Before this stage is reached property owners have the option to refinance and make up the default payments.
You can make best profits from a short sale on properties that are run down and need a lot of work. Banks will be ready to discount these properties to much higher level. However, it must be pointed out that these days you can buy deluxe homes at huge discounts in a short sale.
Savvy investors target over leveraged properties. Properties that have a large 2nd mortgage are an absolute gold mines because second and third mortgage lenders take the biggest hit in foreclosure and short sales. These lenders try and recuperate whatever they can from a bad deal.
The most vital step to a successful short sale is to get the deed signed from the owner of the property. Without this deed you do not have control over the property and will be wasting your time if the property owner change their mind. Once you have the deed signed in your favor you have control over the property and you can now go and negotiate with the lender.
You should never tell the bank that you are a buyer.Once you have the deed signed in your favor just tell the lender that you are the owners representative. You ask them for the “short sales packet”. This packet will explain to you the procedure to make the short sales deal successful.
The Banks will normally request you for a hardship letter. A hardship letter is a letter that explains to the bank as to why the property owner has defaulted on his loan. The lender will also ask you for the financial information which you must provide without delay. If you have a pre-approved loan you can save a lot of time and will make the lender feel you are a serious buyer. They may also ask you for a sale and purchase agreement and you must comply without delay. Ask the lender to pay for the closing costs. If the foreclosure auction is approaching you must ask the lender to delay. They will oblige if they feel they have a genuine offer on the table.
Till such time you have a contract in place do not spend money towards inspections and appraisal costs. This will save you hundreds / thousands of dollars. Don’t also agree to give any kind of deposit to the lender till such time the agreement is signed.
Banks will next seek a market valuation or BPO (Brokers Price Opinion). The lenders have to justify the price to their shareholders and bosses. This step can cause delays and can drag on for weeks. You will need to have patience. The wait will have its rewards.
You will need to get your price right. If it is too much below market value the lenders will not be interested. You have to do your home work and serious research on comparative sale in the area. Your offer has to be around 15% – 20% cheaper than the prevailing market price.
The success to your short sales is the BPO. The lower the BPO the better it is for your bottom line. If possible you have to interact with the property valuers and real estate agents and give them facts and figures supporting your case. If you become good at this you will make money with short sales. Your profits will be larger with bigger properties as the discounts become larger.
Price of a property is subjective judgment. The bank will have its BPO and their own assessment. You have get your facts and figures right to counter their arguments. You have to become good at playing hard ball.
To be successful with short sales you have deal with several parties: the lender which may include second and third mortgagees, the seller and their agents. It is like a minefield that you have to successfully wade through. Properties having extra liens are more profitable as explained earlier but will also be more difficult to negotiate because you will have to deal with more than one lender.
Real Estate Agents don’t like short sales because it takes too long to complete the deal. Their time is better utilized by focusing on normal deals. Sometimes lenders reduce their commissions so it is not worth their time. So when selecting an agent find someone who is conversant with short sales and has done a few of them. Don’t try and go solo because it will cause you grief.
One good strategy is to avoid properties that have more than one offer. This will reduce competition, save time and increase your profits.
