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Short Sales Can Yield Profits. Protect Yourself from Headaches by Shopping for Your Loan First

Posted by  on Jun 17, 2009
 

Looking for properties that might yield better returns than your average listing? That's usually the motivation for those seaching out the short sale property market. It works this way--a homeowner can't afford his/her mortgage payments but can't sell the property because it's worth less than the amount of liens on it. Rather than go through foreclosure, the homeowner finds someone willing to buy at market value, and the lender(s) eat the loss.

That's the point--MARKET VALUE. Not "giving the property away." There are properties all over listed at market value that do not include the hassles of short sale deals. Still, you can make a good deal, but negotiating the deal won't be easy or fun.

First Things First: Shop for Your Mortgage and Get Approved

What's the point of jumping through all the short sale hoops and then finding that you don't qualify for the purchase? So get that out of the way first. Check with several lenders, compare rates, and work with the one you feel you trust. And it's better if the loan agent knows upfront that you are looking for short sale property. He or she might even know of some good property on the books of their own lender (REO property) and help you get a better deal.

Hoop Number One: Finding Property

Many counties post notices of default online and you can see who is in trouble with their mortgage and possibly amenable to a short sale. It's public record. The hard part is that at this point no one has valued the property and the bank isn't going to take your word for what it's worth. "Our biggest challenge [with short sales] is getting the banks to recognize that the property is not worth what they think it is. When we submit offers, and we think it's a fair offer, and we fight with the banks on behalf of...the buyer, it's very difficult to get them to meet us halfway at times," Mia Lutz, president of Say No To The Bank, a community counseling organization that works with foreclosure buyers and sellers, said.

Hoop Number Two: Making an Offer

Short sales can take a much longer time to complete. Many banks have a policy of not even considering an offer until they have received several. Or they get a Broker's Price Opinion (BPO) and try to get as close to 90% of that figure as possible. Do you really want to go through all this for a 10% discount?

The good news is that lately banks have become more flexible about what they will accept. It cost money for them to acquire, maintain, and finally sell REO (real estate owned) if the home untimately ends up on their books. While they will try for 95% of the appraised value, investors are managing to negotiate prices of 75 - 80% of that amount.

Hoop Number Three: Being Patient

However, some banks will only cave in so far. A good real estate agent with experience in the area and in short sales is invaluable. He or she will know what banks will work with you and which won't. You'll know an experienced agent necause he or she will give you an immediate reality check and get your expectations in line. Many investors go into short sales believing that they'll be able to get 50 or 60 cents on the dollar from the appraised value, but that simply is not the case, according to Lutz. Banks are not giving properties away.

 

Still, it's better than buying on the courthouse steps--you don't know what might be clouding the title, what the property is really worth, and because the bank doesn't know either, many bids start right at what's owed--much less than the property value. Should investors give up on short sales all together? No. There are certainly deals to be had for the intrepid willing to go for them. But investors should expect that buying short sale properties requires a lot of time and effort and doesn't always pay off.

 

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