Whenever I meet someone new and the initial small talk shifts from "where are you from" to "what do you do", I often elicit  the same eye brow raising response over and over again when I tell people I work for Bank Owned Brokers. Most people assume that I work for a bank, but when I get into a more detailed description of how I primarily represent buyers who are purchasing distressed properties, the most common response is "wow, you must be busy!" ; followed by questions about how to find these properties, how to finance them, how to rent them etc. Without fail, every time I tell someone about how I work with foreclosures and short sales, they show somewhat of an interest. There is a common belief held by many people that you can easily become a millionaire in the distressed property market. While many people have, there are no guaranties that pursuing foreclosures is an end all be all to becoming the next Donald Trump.

There are two type of distressed properties that are the most sought after; short sales and REO's. Short sales usually happen when a homeowner is behind on their mortgage, cannot refinance and is facing foreclosure. The homeowner negotiates a deal with the bank where the bank agrees to allow the owner to sell the home for less than what is owed to them. This allows the owner to avoid foreclosure and save their credit history. There is a chance that the owner loses any equity in the property, but they would have lost it anyway in foreclosure. The bank agrees to take a loss in a short sale in order to avoid taking ownership of the property. Banks are not Real Estate companies and do not want to own property because it will mean that they are carrying bad debt.  

One reason why there are so many short sales on the market today is because so many homeowners are under water. This means that a homeowner purchased a home for a price that is higher than what the home is worth now. This means that if the homeowner is behind on their mortgage, they will not be able to refinance. For example, John Smith bought a house for $300,000 in 2004. Today, because of the declining market, his home is only worth $260,000. John has an ARM that recently adjusted and he can no longer afford his monthly payments. He is facing foreclosure and cannot refinance because he does not have enough equity in the home and the home is not even worth what he originally paid for it. His only option is to try and sell the home for what the market will allow and negotiate a short sale with the bank so they essentially take what they can get for the home. This will allow John to satisfy his agreement with the bank, save his credit and one day own a home again. If the bank does not agree to a short sale, they will foreclose on the property and try to sell it in the near future. The property now morphs from a short sale to an REO, or bank -owned real estate. I will talk more about REO's in my next post.

Short sales can be a great way to purchase a home for substantially lower than market value where one can either, fix up and sell at market value for a profit, find tenants to collect rents with a positive cash flow or live in. There are also some obstacles to consider when pursuing short sales. First of all, they are often times anything but short. The asset manager s at the banks are so overwhelmed right now with the foreclosure crisis throughout the country that they can take weeks or even months to review an offer. There is also the possibility that there is more than one lien on the property which would lead to another party at the negotiating table drawing out the process. Because the current homeowner was not exactly planning and prepping their home for a sale, most short sales are sold in "as in" condition and are not always ready for an immediate move in. It is important to have the home professionally inspected before signing a purchase and sale agreement to protect your self.

Short sales are a great opportunity in today's market for the seasoned investor as well as the first time homebuyer. As long as you prepare for any possible obstacles before hand, the process is very manageable with the end result producing a worth while real estate venture.