Is Real Estate Short Sale a Great Investment?
August 17, 2008 Update
There has been so much interest in the short sale process that we’ve created two videos to explain the short sale process and requirements from both the buyer’s and seller’s perspective.
These videos contain a wealth of information and are worth the time to view them.
There has been a tremendous interest in the national real estate debacle recently. The national and local media present articles everyday, and Most of these articles are focused on the negative affects of the bubble bursting, without focusing on how to profit from the situation.
Making an offer in a preforeclosure situations is one of the ways that you could profit. To understand more about foreclosures and the different phases, read Daytona Beach Foreclosed Homes. Florida has been particularly hard hit by mortgage defaults and late payments and in my local market, the number of Daytona Beach short sale offerings is increasing.
Understand that this is not a get rich quick opportunity, you may be able to purchase a home at a significant discount by making an offer on a short sale home.
What is a Short Sale?
Simply, short sales are when a mortgage lender is offered less, often much less, than the mortgage balance for a home before the foreclosure is final. The bank does not own the property at this point, just the mortgage lien, so the home must be for sale through the owner of the property. The owner must agree to the short sale as well as the bank. Many preforeclosure homes are on the market. The bank gets money without completing the full foreclosure process and the home owner keeps a foreclosure off their credit record.
Before a home is formally and legally foreclosed it is said to be in pre-foreclosure. This is the period before the foreclosure is complete and could take some time, in some states up to a year. It is the period between when a home owner misses the first payment and the final foreclosure. What’s important to understand is that the foreclosure process is very expensive for the bank or mortgage company. Foreclosure costs as high as $40,000-$50,000 and higher have been mentioned in the national media.
The problem for the bank is that the initial cost of foreclosing is not the end. Now the foreclosed home is added to the already saturated homes market and they need to sell in a market where very few homes are selling while maintaining the home and paying insurance, taxes and maintenance. That’s why they’re interested in receiving offers that are for less than the value of the mortgage.
The Short Sale Process
In many cases, you don’t know when a home on the market is behind in payments. There are some services that indicate when the home in in foreclosure, but that doesn’t mean it’s on the market or that the owner will cooperate with a short sale offer. The Daytona Beach MLS does not state whether a home is a candidate for short sales unless the agent entering the information enters the information in the comments. This is where the work comes in. The best option is to engage a real estate agent who can find properties for you in the price range where you want to make a offer.
The best way to understand the process is to use an example. An offer was made last week to a bank for $250,000 on a home with an outstanding mortgage balance of $425,000. The offer has been presented to the lender and now we wait for an answer. The bank will take some time to make a decision. That make take weeks. They will consider the offer and compare any other offers. The lowest offer will not always win out. A cash offer with quick closing may trump a slightly higher offer with financing and a later closing date.
You will need to find a property or properties to make offers. This may take some time and will mean some work. Let the real estate agent do most of the work for you. Be specific on what you are looking for and don’t accept anything else. Treat this process as a business transaction.
How low should you go? There is no certain answer as each situation will be different depending on the property and the bank. The banks are not stupid and will not give away the property. They have formulas that they use including appraisals and local market conditions to determine what they will accept.
My advice would be to make a short sale offer somewhere around 65% of the price that homes were selling for at the peak of the bubble. That’s very loose guidance, but there’s a good reason behind it. Home prices have fallen over the past two years and there are predictions that they may fall further. Now, depending on the underlying market, offering 65% of the bubble high, you are protecting yourself on the projected extreme downside. If your local market has not been hit hard by the real estate shock, then you will need to adjust for your actual price decrease. Again, talk to a real estate agent to understand you local market and for short sale guidance. If you go lower you risk nothing other than being rejected.
Real Estate Investment Opportunity
The situation is that for now, there are more homes in a preforeclosure position than there are people who are willing to make an offer. Also, we are in a cycle and home prices will eventually begin to rise again in most markets. In markets where prices fall 25% and you purchase a property at 35% or lower, you will be in a position to realize significant gains in a short period. Yes, a short period because prices will begin to rise within two to three years, maybe much sooner in many markets.
During the period where you are waiting for prices to rise, you can use the property as a rental property and take advantage of the tax benefits of deducting interest, taxes, expenses and depreciation.
There are tremendous short sale opportunities in many real estate markets nationwide. The Daytona Beach real estate market is one of these markets. The process requires patience and discipline, but you can make a very wise investment that could result in significant profit over a few years time. If you are interested in a Daytona area short sale opportunity, give me a call at 386-566-7503 to discuss options and opportunities.