Opportunities abound when it comes to buying properties in default. A default property is one in which the owner is not paying their mortgage (i.e. they are in “default” of the terms of their mortgage contract). There are various steps in the foreclosure process and different points at which you can purchase the property.
What is a short sale?
A short sale is generally done prior to the bank taking ownership of the property. A short sale generally follows a traditional sale process, and often uses the services of a real estate broker. The short sale is marketed as a property for sale and will be featured in the local MLS system and real estate portals such as Zillow. A sale becomes a short sale when the proceeds of the sale will not pay off the mortgage that is on the property. In that case, the bank agrees to accept less than is owed on the mortgage and allows the owner to sell the property. Often times, short sale properties are listed for sale at a list price that is less than what is owed on the mortgage.
Why would a bank do a short sale?
A bank agreeing to a short sale will result in a financial loss to the bank. Generally, a bank approving a short sale believes that the loss from the short sale will be less than the loss if they foreclose on the property. Banks are not in the business of owning real estate and the foreclosure process is very costly for a bank. A short sale involves the agreement of the bank, the current property owner and a new buyer. This cooperative sale generally results in a smaller loss to the bank than a foreclosure process.
Pre-approved short sales
A pre-approved short sale is where the bank has agreed to the short sale prior to the property being marketed. There is a signifiant amount of paperwork that an owner in default needs to provide to a bank in order to qualify for a short sale. Basically, they need to prove that they do not have the means to pay the loan back. The market value or anticipated sale price of a home being lower than the mortgage balance doesn’t necessarily qualify a borrower to do a short sale. There generally needs to be a “hardship” that makes it so they can not pay their mortgage payment. If an owner of a property goes through the process of getting the bank’s approval for a sale in advance of putting the home up for sale, it is called a pre-approved short sale. These are the easiest and least risky short sale transactions.
Who owns the property?
A good place to start when evaluating a property is to determine who owns the property. At the onset, the mortgage holder owns the property and has the right to sell it provided they can pay off the mortgage and any liens attached to the property. This ownership changes as the property goes through the foreclosure process. Eventually, the bank or bank’s trustee ends up owning the property when a foreclosure is completed.
Understanding who owns the property you are interested in is the first step in purchasing a default property. If they current owner is the mortgage holder, then a short sale maybe an option. It the bank owns the property, a bank-owned sale maybe the only process available.
Is a short sale a good deal?
Well, this depends. Banks often do their own valuations of short sale requests by requesting broker price opinions or appraisals of the property. A short sale may be a “handyman special” or a home that needs work. This happens often when the owner has not been able to adequately maintain the property. This type of home could sell at a discount to the market value. A bank could also accept a lower than market value price in order to facilitate a quick sale and get the non-performing mortgage off of their books. Each situation is different and you should employ the services of a good real estate broker to help determine market value and guide you through the process.
Short sales are a good option when you are looking to buy a discount property. As in all sales, buyer should beware and you should do inspections on the property. Understand what you are buying and the current and anticipated future value of the home.