Fact or Fiction? Common Misconceptions in Short Sales

When it comes to the world of short sales, there are three truths. One, foreclosures are at their highest rate in 30 years. Two, now is the right time to invest in them. Three, an educated investor closes the deal.

There is no question that real estate is a hot topic throughout the country. Everyone has something to say about investing in property, but not everyone has the story straight.

That’s not surprising.

Today’s investing options are infinite and each one is more complex than the next. When a person decides real estate is an appropriate investment, he is then faced with a number of options: Is purchasing a rental property right for him? Should he build a house on speculation?

Should he bid on a foreclosure at a sheriff’s sale when he has never even been inside the house? Should he invest in a short sale when working with a seller who does let you see the inside of the house?

Being that these are just a few of the many choices, it is no wonder that the lines get blurred.

Although I cannot answer all questions about all property investments in this one article, I can clarify some misconceptions regarding short sales.

While it is important to know exactly what a short sale is, it is also important to know exactly what it is not. Many of the people I speak with confuse short sales with bidding on a house on the court steps at a sheriff’s sale or auction. That is simply a foreclosure, and at that point it is too late for a short sale.

Probably the greatest benefit of a short sale is that the foreclosure process is avoided. A short sale deal is solidified during a period called pre-foreclosure, when the owner is beginning to miss payments and before the auction. If a short sale occurs the seller avoids foreclosure, and his credit and peace of mind remain salvageable.

Another misconception is that a short sale occurs after a foreclosed property is bought by a bank. It is normal for a bank representative, usually an attorney, to go to the foreclosure sale. She bids on the property to the loan balance and when no one else bids that high, the bank gets the property back. Ninety-five percent of houses at the sheriff sale DO get bought back by the bank.

The bank then lists the home with a realtor and puts it up for sale. That, too, is a type of property investment, but it is not a short sale.

It is important to remember that only you can decide what type of real estate investment is right for you. What I can tell you is that I find short sales to be a worthwhile investment not only for the profit, but the benefit it offers the seller.

Keep in mind, mortgage delinquency does not occur because people simply don’t feel like paying off their loan. More often than not, the seller has suffered some kind of personal hardship. By investing in his home you may not solve all of his problems, but you do have the power to eliminate a major source of stress.

The State of Short Sales Today

With foreclosures on the rise, negotiating short sales is a prime investment strategy you as a savvy real estate investor must master. In order to do so, you need to understand the state of short sales today.

Loose lending practices by the banks over the last several years allowed people to buy houses with no money down or to borrow more than their homes were worth. Now these same people can’t afford to pay their mortgages. Consequently, the banks are inundated with foreclosures.
Yet they continue to make bad loans. Meaning that the number of foreclosures is only destined to keep growing.

Ironically, the increase in foreclosures is making the banks more difficult to deal with. Since they have so many foreclosures on their hands, they believe they will make more money buying back the houses and reselling them as opposed to taking a discount on a short sale.

Not necessarily true. For several reasons.

First, the foreclosed houses become vacant. With no one living there to run the air conditioner or heat, the house becomes defenseless against the natural deterioration process. So while the bank maintains the selling price, the value of the house decreases as the need for repairs increases.

Next, homeowners don’t want to buy houses that need extensive repairs. So foreclosed houses that the bank did not invest time, effort and money to repair do not appeal to those looking to purchase a home. These buyers want to move into a livable house, not one that will require more fixing up than a new coat of paint on the walls requires.

Finally, the location of the property could keep potential buyers away. If, for instance, a murder occurred on the same street as a foreclosed house, the value of the property diminishes in direct proportion to the increased danger of living in that section of town. But if the bank holds on to the property intending to make a profit, all that property becomes is an outstanding bad debt for the bank.

It is thus your job as the investor to understand the state of short sales today. When you do, negotiating with the banks for deep discounts becomes easier. And gets you more properties at lower prices.