For investors, there are a couple different routes to take when negotiating a pre-foreclosure investment. There is the standard “I’ll save you from foreclosure” approach, which seems to work very well. However, there is also the short sale strategy to consider. In both cases normally all three parties can be satisfied with the outcome. If a deal is finalized it really is a win-win all around- the owner leaves with their credit still intact, the lender gets back at least most of their initial investment and the investor has a nice piece of property on his hands.
When dealing with pre-foreclosures it’s beneficial to get familiar with the various options involving all parties that have a stake in the property. One type of foreclosure negotiation that most investors are familiar with is the private party buy-out. With an owner facing foreclosure, the individual investor has leverage when negotiating a purchase price.
For investors, it’s best to seek out the pre-foreclosures that have a good amount of equity built in order to make the investment worth their while. The more equity in the property the more both parties can benefit. The owner may be able to avoid foreclosure and come out of the transaction with little extra cash to start-up once again. However, when there is very little or no equity, other options must be considered.
The less known and fairly alluring option is a short sale. Recently this strategy has gained some attention due to the current real estate slump where some markets have actually seen a decrease in home values. A short sale is basically when the owner owes (due to a variety of reasons) more than they can sell the house for. If this is the case the lender will basically take what it can get to help curb the total loss relative to the total costs of a foreclosure.
Here is a scenario to better illustrate the short sale process: We’ll call him Bob Venture. Bob has purchased an investment property for $150,000. He takes out a mortgage for $130,000 and rents the house to cover the cost of the mortgage. After about a year or so the tenant looses his job and falls behind in payments for several months. After a disastrous eviction process the property is left with quite a bit of damage and the appraisal price is now way under $130,000.
Meanwhile, Bob has had some health issues for the last 6 months and is also not able to work. Let’s just say when it rains it pours because now that Bob is trying to sell his rental property there have been no prospects and he is now facing foreclosure. Home prices in his area have been at a standstill and with the extra damaged incurred to the property the home is now worth less than the total amount owed.
At this point Bob considers contacting the lender about a short sale. The lender assigns the case to a loss mitigation specialist to analyze the different options. The lender may choose a foreclosure, a loan restructuring agreement, a deed-in-lieu-of-foreclosure, or a short sale. In order to assess the option that is in the best interest of the bank the specialist must answer a few questions. Is Bob capable of a loan restructuring considering his present situation? What are the legal fees involved in a foreclosure? Is there a second mortgage or unpaid taxes?
Here is where the investor comes in. Chuck Chance, a friend of Bobs, decides he wants a piece of the real estate action and offers to purchase the home for $125,000. With all factors considered the bank accepts the offer and all parties seem to have benefited.
And that my friends, is the short story of a short sale and some of the faces of pre-foreclosure. So here’s your opportunity to turn one almost-tragic scenario into a creative real estate investing venture of your own
