Real Estate Investing Articles

The short sale follows the maxim that is universal to all forms of investing, the notion to “buy low and sell high.” Granted, this is not always easy to do but when such an opportunity presents itself then the opportunity should be taken advantage of. This is where the concept of a short sale brings great opportunities for those looking to purchase real estate at a low price.

When the seller of a home owes more than what the value of the home actual is worth the seller is facing quite the conundrum. It simply would not make much sense for an individual to continue paying a mortgage that is more than the value of the home. In the absence of a change in their financial circumstances, the homeowner will often allow the bank to foreclose upon the home.

This, of course, creates a conundrum for the bank. Banks are in the business of lending money. Banks are not in the business of selling real estate. As such, the bank may be willing to sell off the house and recoup some of their money as soon as possible. The operative word here is “some.” In other words, the bank may be willing to take less than what is owed on the property. In some cases they may even be willing to take less than the property is worth in order to avoid the foreclosure and sales process. This, in real estate parlance, is what is known as a short sale and it can present a tremendous opportunity for a real estate investor.

Keep in mind, just because the bank is offering the property as part of a short sale does not mean that the bank will be willing to practically give the home away. There may be a need for a little haggling and negotiation for the price you want and don’t be surprised if the bank does not totally give in to your demands. However, do not be disappointed either and simply move on to your next potential acquisition.

Now, some may frown upon capitalizing on a short sale because it would seem as if the investor is taking advantage of the person whose home was foreclosed upon. This is simply not an accurate statement because the buyer in the short sale has absolutely nothing to do with the foreclosure itself. The foreclosure is the result of the borrower not meeting obligations with the lender and the lender acquire the property. In many cases a short sale will include provisions that release the borrower from any further obligation for the difference between what is owed and the price for which the property is sold. Should the bank make the short sale this will also keep a foreclosure off the borrower’s credit report. In essence, a short sale that goes through is typically very beneficial for the borrower.

A short sale has the potential to be great opportunity for acquiring real estate at a bargain price. And, as every wise investor knows, no good opportunity should ever be overlooked because such deals do not present themselves very often.

A.M. Caro is a freelance writer from Southern California.

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Posted by A.M. Caro under foreclosures | No Comments »

Foreclosure auctions allow investors the potential to buy properties at a huge discount. Anyone who even glances at network and cable news programming is aware of the current foreclosure crisis in the United States. For those not entirely familiar with the situation, essentially what has happened is many millions of individuals have been unable to meet the terms of the variable rate mortgages and have seen banks foreclose on their property. Of course, the bank needs to recoup the money that it has lent out and then means it must auction off the home that was foreclosed upon. This can create an opportunity for an individual looking to acquire property at a reduced cost as foreclosure auctions can provide a number of excellent deals.

Now, some may be wondering what value there is in purchasing a home for investment purposes during a foreclosure in a time period when real estate values are diminishing. This is a valid question and there are a number of legitimate answers to the question that may put concerns at ease. First, the real estate market will have its ups and downs. During an up cycle many people jumped on the real estate bandwagon since the value of property was increasing upwards of 7% a year meaning that the equity of the home would be worth far more than the mortgage. Unfortunately, as real estate values declined many people who were unable to make their mortgage payments could not refinance their high interest loans and could not afford to wait it out until the next up cycle so they allowed foreclosures to process.

It is important to note, however, that if you purchase the home at a low rate and the bottom is no longer falling out on real estate property values then you will not run a significant risk of losing out on the investment. Yes, there is risk with any investment (something many of the subprime borrowers should have realized) but the market has its ups and downs and it is only a matter of time before the equity on homes will eventually appreciate. As such, being able to purchase a home at a “rock bottom” price brings with it many rewards and incentives.

Keep in mind, the bank is mainly trying to recoup the remaining balance on the mortgage and may be willing to sell the home on the auction block for less than its full market value. Remember, the bank has been paid some of the money it previously lent back so it would not lose much money if it let the home go for less than its market value. No, you will not purchase a million dollar home for $50,000 like some obtuse infomercials claim but you may find yourself acquiring a 15% or more discount on the home. This makes the equity investment immediately profitable and also makes foreclosure auctions very attractive propositions.

Once again, there are ups and downs in the real estate world and the current down cycle has created a tremendous opportunity for those looking for great deals via foreclosure auctions. As such, foreclosure auctions remain a valuable service for any looking to expand their real estate investing interests.

A.M. Caro is a freelance writer from Southern California.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by A.M. Caro under foreclosures | No Comments »

A loan that is “subject to” is a seller-financed transaction, whereby the seller remains the borrower of record with the lender. Most often the mortgage payments are made by the buyer of the property directly to the lender. In exchange for a down payment (consideration) and promise to make regular payments until such time as the loan is fully repaid, the seller agrees to transfer the title or deed of the property to the buyer.

“Subject to” financing is becoming increasingly popular among homeowners, especially in the wake of the sub-prime crisis, as an alternative to foreclosure and its credit related consequences. A homeowner need not be in a financially distressed situation, but may just need to quickly sell the property as a result of job relocation, divorce or ill-health, among other reasons. “Subject to” financing appeals to first-time home buyers with no credit history, buyers who have a poor credit history, and investors looking for property without leveraging their own credit. It also has appeal to sellers and buyers who are looking for a quick turnaround or elimination of realtor fees and commissions. The offering of a property “subject to” can be considered creative packaging; in a buyer’s market such as this, it could be financing that ultimately makes the deal.

Generally, the majority of the risks involved in a “subject to” transaction are borne by the seller, who is also the original borrower. The seller is not released from the liability and expects that the buyer will make the payments faithfully as required under the existing terms of the loan agreement. If the loan becomes delinquent, the borrower of record (seller) will be named in any action or foreclosure by the lender.

Unfortunately, there are unscrupulous buyers who prey on unsuspecting, desperate homeowners. They may enter into a “Subject to” transaction with no intention of following through on making the mortgage payments unless they can flip the property to a renter or lease option tenant willing to pay more. The seller is then left holding the bag. Fortunately, in response to a growing number of reported cases of investor abuses, many states are enacting regulations with the aim of protecting homeowners from predatory buyers.

An additional concern for the seller is if the mortgage company becomes aware of the “subject to” financing. While it’s highly unlikely, if the lender discovers that title to the property has been transferred, they may trigger the “Due on Sale” clause of the original loan agreement. This would require that the seller redeem the entire amount of the loan, not just the monthly payments.

<The enticement of a swift conclusion and transfer notwithstanding, there is a need for due diligence by both the seller and the buyer in a “subject to” transaction.

The seller needs to ensure that the buyer has the means to purchase the property or the means to settle a lawsuit if they fail to fulfill their end of the bargain. In effect, the seller has become a lender of their credit and would be well advised to run a traditional credit check, including obtaining a credit report, calling referrals and requesting pay stubs, bank statements and income tax returns. The requirements don’t have to be as stringent as those imposed by a bank, but the seller should feel comfortable that the buyer can and will honor the terms of their contract.

The seller should also have a lawyer draw up the contracts and not be persuaded that generic one-size-fits-all template will work for their transaction. If the contract is poorly drawn, the seller is put at greater risk of being unable to enforce the contract in the event the buyer does not live up to his side of the contract.

As the buyer of the property, subject to the existing loan, the buyer has the right to receive copies of the mortgage documentation, including the coupon book, deed, insurance and title insurance policy, survey, appraisals, etc. It is the responsibility of the buyer to review these documents and/or have them reviewed by their attorney. The buyer may also want be given 3^rd party permission to make inquiries with the lender as regards outstanding balance, interest rates, delinquencies and any other pertinent information.

Most importantly, the buyer needs to be certain that there are no additional liens, judgments or other encumbrances on the property. The way to do this is to have a title search done on the property. Title insurance is relatively inexpensive and acts as an insurance policy covering potential title issues in the future.

The “subject to” transaction can be fraught with risks to both the seller and the buyer. Sellers should ensure they perform the proper due diligence on potential buyers. Buyers should not enter into “subject to” contracts lightly with the thought that they can back out if they can’t flip the property. “Subject to” financing carries significant risk both for the buyer and seller. Use with caution.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under foreclosures | No Comments »

Not long ago, many homeowners were reluctant to consider a short sale of their property as an alternative to foreclosure. A short sale, in simple language is the sale of a house at a price below the outstanding loan payoff amount. The reason for that reluctance was because the IRS taxed the difference between the mortgage loan balance and the amount at which the house was sold. For example, if a mortgage loan balance was $100,000 and the house sold for $80,000, the IRS considered the $20,000 difference as income. Many homeowners weren’t even aware that they would have to pay tax on this “phantom” income, and were (unpleasantly) surprised when they received a 1099 form from their lender.

Thanks to a recently enacted law, the Mortgage Forgiveness Debt Relief Act of 2007, which permits tax payers to exclude that so-called “phantom” income (up to $2 million) from federal taxes, more and more financially distressed homeowners are seeing the benefit of the short sale as an alternative to foreclosure and a way to avoid long-term damage to their credit history.

Foreclosure rates are skyrocketing, up 60% over the same period last year, and there is a good opportunity for investors to make money from the housing crisis created by the sub-prime debacle. On average, 1 in every 577 homes will go into foreclosure; in some areas of the country, namely Nevada, California and Florida, those numbers could be as high as 1 in every 165 homes.

So, where are these pre-foreclosure homes and where can I get information about them, anyway? They’re everywhere. Find your own contacts by picking up a local newspaper, checking the courthouse filings, or simply word of mouth. Then get busy with cold-calling or mass mailings. It may take a great deal of work, just to get a single qualified short sales candidate.

Your next step is a visit to see and thoroughly inspect the property and neighborhood. Oddly enough, the worse condition the property is in, the better for you when dealing with the lender… the bank does not want to have to fix up a foreclosure property. Get a list of all outstanding liens, attachments and encumbrances on the property, in writing, from the homeowner. You need to verify this; don’t take it at face value.

If a short sales opportunity is feasible, you’ll need to go back to the homeowner and get authorization to receive their mortgage information from the lender, as well as release forms assigning you their property rights, subject, of course, to outstanding liens.

Your destination at the bank or mortgage company will be the Loss Mitigation Department. There, it’s your responsibility to convince the lender that you are presenting the best possible deal. It’s a matter of salesmanship and presentation; the better you are at PR, the less likely your offer will be declined.

Why would a lender be willing to accept a short sale offer? Basically, from a lender perspective, it’s a choice between the lesser of two evils. The banks know that the short sale may be their last best hope to avoid an expensive and protracted foreclosure process. They are cognizant that, either way, they are taking a loss on the bad debt; the real question is how much of a loss and how soon? In general, banks like to write off their bad debt sooner than later.

At a minimum, and each lender or mortgage company has different requirements, you’ll need to present to them:

• A letter of hardship from the homeowner, detailing the reason why they can no longer make payments or their inability to fully repay the loan;
• Proof of hardship, including federal tax returns, pay stubs and bank statements;
• Authorization from the homeowner allowing the bank to release personal mortgage information; and
• Proof that the homeowner has attempted to sell the property through traditional methods, before resorting to a short sale; typically, an advertisement, sales flyer or a copy of the listing agreement with a realtor will suffice. Some lenders require that the property be on the market for a specific period of time.

The lender will either commission a new appraisal or a broker’s price opinion (BPO) on the property, to determine the fairness of your offering price. While it’s tempting to lowball your offer, you should know that, in general, most short sales are between 5 and 35% below the market value. However, given the expected surge in short sales as a result of the new IRS law, you may be able to make an offer of as much as 40 to 45% below the market, and have it accepted.

Though it seems implausible, short sales can be a win-win-win situation; investors can acquire a property below market price; homeowners can avoid foreclosure and maintain their credit rating and lenders can reduce their loss on a bad loan.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under foreclosures & short sales | No Comments »