Taking Advantage of Short Sales to Avoid Foreclosure
Posted on February 4, 2009 in the Foreclosures category
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One of the tricks at the disposal of mortgage lenders to forestall foreclosure in soft real estate markets is a short sale. Once a homeowner with a high mortgage balance relative to the home’s market value has gotten behind in his monthly payments, the lender must decide how to handle the borrower’s default. The lender can either pursue foreclosure, or can try to convince the homeowner to sell the home to pay off the remaining loan balance.
If the owner is willing to cooperate and sell the property, lenders will often settle for an amount far less than the current balance owed on the mortgage loan. Lenders would rather give homeowners a shot at selling the property below market value before running a foreclosure auction. When a home is sold at a price that won’t net enough proceeds to pay of the entire mortgage balance, this is called a short sale.
Though it seems counterintuitive, lenders are willing to give the go ahead for home sales at prices that won’t satisfy the full balance owed on the mortgage. This short sale process provides a lender-approved means of mitigating a lender’s losses due to a homeowner’s default and subsequent foreclosure on the property.
Why would a lender approve the short sale knowing it will result in a loss? In the event of default on the loan that carries a high balance, the lender is simply trying to lose less than he might if he were to actually foreclose and repossess the house. The cost of foreclosure is high. It includes legal fees, lost interest, eviction costs, property taxes and insurance and real estate commissions.
This is why negotiated short sales may often bring the lender a higher net amount than a home acquired through foreclosure and resold later. Lenders have taken so many REOs (repossessed houses) they are now facing enormous costs, time, and losses as these non- performing assets are sitting on their books. But the foreclosure costs aren’t the only thing that creates an enormous pressure on lenders.
Lenders are also pressured by local governments to keep repossessed, unoccupied homes in good repair in order to keep away vandals and drug criminals. Some municipalities even file civil lawsuits against lenders who fail to keep REO properties in good repair, result in even greater losses for the lender. Considering all of the ways in which a foreclosure could cost the lender money, short sale becomes a lender’s preferred alternative.
Many lenders try to get rid of their large inventory of REO homes by making huge price cuts. Still, many lenders have found that owning a large inventory of foreclosure properties is more of a burden than it is worth. This is why lenders are increasingly reluctant to avoid foreclosing on homes if there is any other alternative available. Short sale has become such a widely used option that many lenders now have staff on hand whose job is to negotiate short sale offers submitted on foreclosure properties. Lenders are taking every possible step to avoid adding to the ever-growing burden and expense of owning vacant foreclosure properties.
For those who buy homes through a short sale process, there is a golden opportunity to buy a home at a deep discount prior to the public foreclosure auction. Consider though that a short sale can only take place with lender approval. For investors, short sales present an opportunity to buy and resell a property at a significant profit, or to convert the property to a rental for ongoing cash flow.
Why would a homeowner entertain an idea of a short sale? Due to current economic crisis many homeowners are finding themselves without steady employment. Without a paycheck families are falling behind on mortgage payments. Many are now facing foreclosure.
Imagine owners who have an over-financed house with high payments they can no longer afford. A short sale is often the only way for them to gracefully escape from their tough situation. For you as an investor a short sale is a unique selling proposition to foreclosure marketing and making great profits.
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IMO, real estate agents should be required to take a class on short sales and foreclosures just the same way they are required to take an MLS course. Many areas of the country, such as parts of Northeast New Jersey have a high amount of listings that say “pending 3rd party approval” which is a short sale. Most realtors shy away from these and adversely force their clients into higher priced property. I love short sales and I love negotiating them. I have executed my best deals in short sale status. To me, shying away from these is negligence.