In 2008, the real estate short sale (also referred to as the "short sale foreclosure") will become one of the hottest topics in real estate.
But it doesn't take a crystal ball to make such a prediction. After all, the numbers speak for themselves. We are now seeing an unusually high number of people going into foreclosure in the U.S. This is partly the result of the subprime mortgage meltdown that came to a head in 2007, and the trend will probably continue for another couple of years at least.
So what is a real estate short sale, and how can the savvy real estate investor use it to his or her advantage? The answer to this question lies within the series of events leading up to a home foreclosure (bearing in mind that the process varies a bit from state to state).
Three Choices for Homeowners
In general, a homeowner who is facing foreclosure can take one of three paths. The homeowner can either...
- Get back on track making the mortgage payments in order to keep the home
- Sell the home before the bank forecloses on them
- Allow the bank to foreclose on the home
Clearly, the first option is the most desirable. If at all possible, the homeowner should try to get caught up on mortgage payments in order to keep the home. Many lending institutions even have programs in place (such as reinstatement and repayment plans) to help homeowners do exactly that.
On the contrary, the last option listed above is the least desirable of the three. Nobody wants a foreclosure to go on their credit history, because it will make future mortgage approvals / home purchases more difficult. So option #3 should be avoided at all costs.
That leaves us with option #2, selling the home before the bank forecloses on it. And that's where the real estate short sale comes into the picture.
Taking the Short Sale Option
In the middle of the road, we have the real estate short sale. This is a way for the homeowner to sell the home quickly in order to avoid a complete foreclosure of the home. With this approach, the lender gets some of their money back, the homeowner avoids foreclosure, and somebody gets a good deal on a home. In most cases, it's the closest thing to a "win-win" you're going to find under these circumstances.
How does the buyer in this process typically get a good deal? Because of the very nature of the short sale. Through this process, the lender agrees to let the homeowner sell the home for less than the amount the homeowner still owes to the lender. Naturally, this often means that the home will be sold for less than market value as well.
Most people ask the next logical question: "Why would the lender agree to selling the house below market value?" They do it because the foreclosure process can be expensive, adding more costs on top of a nonperforming loan that's already costing them money. So they want to get that home / loan off their books as quickly as possible. The real estate short sale is a way to achieve these things, without having to go through the extensive (and expensive) process of foreclosure, real estate auction, etc.
This investment potential, combined with the fact that we have record numbers of foreclosure homes available right now, is why you will hear a lot more about the short sale in 2008.
