Investing In Foreclosure Versus Short Sales
Due to job losses, upward rate adjustments and the downturn of the real estate market, many homeowners are unable to make their mortgage payments. This has resulted in a great deal of distressed sales, namely foreclosures and short sales. According to the figures of April given by Lender Processing Services, almost 2.2 million homes were in foreclosure in the U.S. In general, distressed properties sell 30% less than non-distress properties. So, which is the better deal?
What is a Foreclosure?
Foreclosure is the process that a lender uses to gain title to a property due to a homeowner’s loan default. The lender recoups their loan investment by selling it at a trustee sale. If there are no other buyers, the bank takes the property into inventory as real estate owned (REO). Banks are not in the business of property ownership nor management, and they are legally required to sell off these non-performing assets. This is where you, the investor, can scoop up a great deal!
What is a Short Sale?
On the other hand, short sales are properties sold prior to foreclosure at a discount because the current market value is less than the loan amount. Thus, the loan amount is discounted. The homeowner still has title but the sale must be approved by the lender, who suffers a capital loss upon sale. To avoid the additional expense of the foreclosure process, banks are willing to unload properties at or below market value. Again, you can scoop up a bargain!
According to Re/Max, the average price of foreclosed property was $185,000 while that of other conventional property was $267,300 in April. In addition to lower prices, bank owned properties can be purchased much more quickly than a typical short sale.
Despite the lower price, bank owned properties have their share of problems. These foreclosed properties typically sit vacant for weeks or months, lack regular maintenance, attract squatters and copper thieves and need repairs. Most banks sell their foreclosed properties in an “as is” condition. You must discover what repairs are needed and invest money and time to fix those problems.
Short Sale Facts
This type of distressed property is in relatively better condition, and often do not need repairs. Since properties remain occupied by homeowners, the homes tend to be maintained. Roughly 80% of these properties are of good quality.
However, short sales have their drawbacks. This type of distress sale is actually a very lengthy process, which could take months to finalize. You need to be loan qualified and have a much longer time horizon to purchase the property. If you need to move to a new house within weeks, this is not for you! Furthermore, if there are other lienholders, all lienholders must approve of the sale.
Some Tips to Remember
• Get a detailed home inspection prior to purchase
• Get at least 3 itemized repair bids from reputable contractors.
• Hire a foreclosure/short sale savvy buyer’s agent.
Foreclosed (bank owned) property and short sales can be lucrative. In general, foreclosed properties can be purchased faster but short sale properties can be purchased in better condition. The better deal depends on whichever distressed property type can be purchased with the least time hassle at the lowest cost basis, relative to fair market value. The cost basis includes closing costs, down payment, repairs and updates. If fixing and flipping, add holding costs, and if fixing and renting, add vacancy costs. In either case, do your due diligence and invest wisely!