A Short Sale to Avoid Home Foreclosure

By: Kris Koonar

You can buy a home before it goes into foreclosure, if you manage to arrange a short sale. A short sale is when the homeowner sells the home to you at a price lower than what they owe to the bank or other lender. Short sales are a way of reducing the loan against the property, so it is more marketable. It means a loss for the homeowner, but there are many reasons why an owner may choose a short sale.

Obviously, the home might fetch a lot more on the open market, but the market has slowed considerably in recent times and homes can take as long as six or seven months to sell. Sellers in pre-foreclosure are therefore, generally highly motivated. They want to be free of the bank and the mortgage payments and move on with their lives. It is very definitely in the homeowner's best interest to achieve a sale, before the bank actually forecloses to prevent the destruction of their credit rating and make up some of the loss of equity that has already accrued.

There are a number of benefits for you, as an agent or an investor in getting listings or buying pre foreclosures. First of all, the price of such properties is much lower than the market prices. The owner is obviously in a hurry to sell the house, before the bank can foreclose. So, they are more inclined to actually listen to the offers they receive. You can find pre foreclosure homes that are as much as 50% lower than the market value. You also have the advantage of dealing with the owner directly. The buyer is in total control in a short sale deal. Also, there are no carrying costs. Until you in turn sell, no one is actually making any payments.

Once you find out that the seller is in distress and a foreclosure notice has been served, a court date is only weeks away. The homeowner knows, at this point, that unless a buyer can be found, the bank will foreclose and his credit history will be destroyed.

The value of the home may not be much higher than the outstanding balance. Technically, the seller is responsible for any shortfall, but the mortgage company knows that getting more money from someone on the verge of bankruptcy is impossible. They might happily agree to the shortfall, if your bid is not too small. A foreclosed home costs money to maintain and court costs of foreclosure can run into thousands of dollars and the mortgage company can minimize its loss.

Ultimately, you have to convince the mortgage company and sell them the idea of a short sale, along with the seller. The entire process is administrated by the lender and the lender will only consider a short sale if the property is worth less than what is owed. So, first of all, determine the market price and whether you can make a profit after paying the repair costs. Contact the lender and negotiate, based on these findings.

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