In a Short Sale, What Is the Investor?
A short sale is a strategy often deployed by a home owner in danger of being foreclosed on, a lender looking to cut its losses, or an investor hoping for a good return on his money. In the best case scenario, it offers something to all three parties. The short sale strategy is used after a foreclosure has started but before it reaches the auction stage. The word "short" refers to the fact that selling price is negotiated for an amount less than the outstanding balance owed on the mortgage.
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Strategy
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The primary reason an investor would be interested in purchasing a short sale property is that he might be able to buy it for less than market value, allowing a quick return on his money if he decided to refurbish and sell it quickly, or a lower entry point if he wants to hold it and wait for appreciation or even rent it out. The tricky part to the process is that any short sale must be approved by the home owner's lender.
The Offer
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While some investors make the mistake of offering an extremely low, referred to as a "lowball" offer, for the property, the bank will only agree to a short sale if it makes financial sense for them to do so. Foreclosures cost money when they run full term. A bank weighs the cost of allowing the foreclosure to proceed against receiving a purchase price that only amounts to a percentage of what is owed on the mortgage. It behooves the investor/buyer and his real estate agent to find comparable sale prices for similar houses in the area and make sure that the short sale offer is not too far below that.
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Buying
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Short sale investors spend lots of time driving around neighborhoods, or paying others to do it for them, looking for recent foreclosure signs that have been posted. Part of the foreclosure process requires that the lender place a notice of the pending action in the yard of the property. This is a like a huge, blinking "opportunity" sign to a property investor who, in a certain percentage of the cases, will be able to buy it at a substantial discount if she moves fast.
Profitability
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An underwater mortgage is defined as a property that, due to declining prices in the local real estate market, is worth less than the amount of the mortgage, which is a bad situation for the home owner and lender but a great chance for an investor to swoop in, buy an asset at a discounted price, and turn a profit. Short term investors might choose to do a quick remodel that boosts the property's value by ten or twenty thousand dollars and put it back on the market within a few weeks. Others might decide to wait for the price appreciation that they bet will eventually come. In the meantime, renting the house to a tenant provides monthly cash flow.
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References
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