Short Sales or REO's

When the Bank Becomes the Seller

Short Sales or REO's are a Buying Method that really begins where Foreclosures left off.

As I mentioned in that section, depending on the area you are interested in purchasing in, many homes that are going into foreclosure will have mortgages that are more than the property is worth. This situation is called being "upside down."

When a homeowner finds themselves in this situation, they have very little recourse. If they place the home on the market, and they owe more than it is worth, then they will have to make up the difference between what they sell it for and what they owe the bank out of their own pocket. Also, they must pay the realtor if they sell it the traditional way. Obviously people who are losing their homes because they can't afford the mortgage don't have the money to do this.

This is where an investor can come in and help a homeowner. With the Foreclosure Buying Method, you were dealing directly and only with the homeowner. The technique used was that there was some equity left in the property to either give the seller money to walk away with or split 50/50 with them. In a Short Sale, there is no equity, so you will be dealing directly with banks that hold the mortgage notes on these properties.

If the bank ends up foreclosing on a property, then that situation is called an REO (Real Estate Owned) - owned by the bank. Bank's don't want to own property - they're in the business of selling mortgages. When a home ends up being REO'd, the bank now has to sell the property, a time consuming and costly venture for them if the home doesn't sell quickly and sells for less than the mortgage balance they had on the property. Banks are ending up taking huge losses right now with the large amount of foreclosures that are occurring in the marketplace.

So what this means for an investor is when you find a seller in pre-foreclosure, you will ask them to sign an Authorization to Release Form so that you may speak directly with their bank(s) and review their loans.

Then it's negotiation time. The bank already knows it is facing a Short Sale situation if they try to sell the property either at auction or on the open market, so you will be saving them time and hassle of doing that by offering to pay off the loans. But not the face value. This is how you regain some of the equity in a property, and this is why Short Sales can be profitable to real estate investors.

Let's say you've found a homeowner who has two mortgages on their property for a total of $100K. The 1st is for $80,000, and the 2nd is for $20,000. The house, however, now has a fair market value of $85,000. So you offer the 1st lender $70,000 and the 2nd lender $5,000 and they accept. You've just made an instant $10,000 in equity (paid $75K, house worth $85K), the homeowner can walk away from their property free and clear without damage to their credit and no more mounting bills, and the lenders have at least recovered some of their original loan amount. WIN-WIN-WIN.

Now you might be saying there is no way the 2nd lender would discount their note by $15,000. But remember, if this property goes to a foreclosure auction and sells for $80,000 or less, the 2nd lender will get nothing (the 1st lender always gets paid first)! So $5,000 is better than zero!

How much you can discount a note is going to vary by state and area and will depend on the overall market conditions (remember supply and demand), but start low and work you're way up to an amount you can live with. Or just walk away and move on to the next property if you can't get an amount that will make you money - there's always another property waiting out there.

Again, this is too complex of a subject to try to tackle without some education. A Good E-book for a very reasonable price is shown on this website, and may be worth it for those of you considering this strategy. For someone with persistence, a willingness to put up with the agonizingly slow bureaucracy of lending institutions, and a lot of motivation, there are very good profits to be made with Short Sales!