Short Sale vs. Forelclosure

There has been a ton of talk lately about short sales. What are they? How do I find them? Are they good investment opportunities? What does it even mean?

A short sale is when a seller is facing foreclosure and is trying to sell the property for less then they currently owe the bank. The bank is going to "come out short" on the sale of the property. For example, a homeowner who is has a home that is worth $400,000 in today's market but owes $500,000 and can no longer afford it. The seller can no longer afford the home and needs to sell, but does not have the $100,000 difference to pay the bank to get out shall he acquire a purchaser willing to pay $400,000. What the homeowner has to do is contact the bank and ask if they are willing to take less then he owes. They may be willing to "short" themselves on the sale of his (their) home.

Why would a bank be willing to do this? In today's market there are an abundance of homes facing foreclosure as I am sure you must be aware of, I think at this point my cat is aware of it!! When a home is foreclosed on the bank becomes the solitary owner of the property. They don't want the home however!! Why would they? It becomes a negative hold for them, they now own a home that is bringing in no income and probably requires fee's of some sort to hold, ie. HOA fee's, taxes, electric bills, etc. It may be beneficial to the bank to accept less then the balance of the homeowners mortgage to simply move on and get the home off their books. So at times they will be willing to take less. However, it is COMPLETELY up to the bank as to the amount they will accept. The homeowner must also prove that they can no longer handle the payments by submitting W-2's, pay stubs, hardship letters and more.

A short sale is not an easy process for either party. The buyer has to wait for a response from the bank, which means he/she/they can not take advantage of other opportunities that may arise. Once your offer is submitted it can take up to two weeks to get a response from some banks, then up to 6 months to close. The bank, as any other institution would, waits for better offers and does not want to simply give the property away as some would assume. Being a "savy" investor and low balling a bank thinking you are helping them out will get you no where. They know what its worth, trust me they have done their homework.

From a sellers standpoint a short sale is in no way a saving grace. You are required to pay taxes on the difference paid to the bank. Example, you owe $500K, bank accepts $400K, you owe taxes on $100,000!! That's right, the government is not going to just let you walk away......did you really think they wouldn't want their due?

And on to Foreclosures -

A foreclosed property is one that was not sold through a short sale, or auction (we will talk about that in a bit) and is now listed for sale, usually through a Realtor, by the bank. Now as I said before, a bank is a business and they want the most possibly attainable, wouldn't you? Don't you think they want to make a profit, even if the last owner only owed $100,000 on a $500,000 home? OF COURSE!! And this is why not all foreclosures are good deals, just because a home has the word "Foreclosure" on it does not mean it will make you rich!! Please remember that:

Just because a home has the word "Foreclosure" on it does not mean it will make you rich!!

The word Foreclosure has become such a magnet to new investors, many think if they can find them they will strike it rich, not the fact Jack. Just like anything else, some are good, some are bad. Learn to decipher good from bad and THEN you will become rich!!

People you need to do your homework when investing in Real Estate, and if you don't know where to start, contact a professional, I know of a great one!!

For more information on Short Sale and Foreclosure properties email me today!

- Rick Rapp
Real Estate Investment Consultant
rick@rickrapp.com