Should I Consider Short Sales as a Way to Buy Property at Less Than Market Price?
While short sales are available in all economies, they are much more numerous in a down economic and real estate market. First, you need to understand the nature and definition of a "short sale". A recession and down market generates more homeowners, many of whom purchased property at the height of its FMV (fair market value), who can no longer afford to make their mortgage payments. Many mortgage loans that were in an acceptable LTV (loan to value) position (70% to 80%) are now at dangerous levels (90% to 100%).
Borrowers realize that any "paper equity" (ownership level) they had has disappeared. Instead of trying to find a REALTOR® and go through the trauma of trying to sell their home for a fair price, many allow their mortgage loans to enter default. Mortgage lenders must decide to foreclose or consider a short sale - selling the property for less than the outstanding mortgage loan balance. The bank calculates the cost of foreclosure (collection, attorney, advertising, and auction fees) to determine if they will recover these costs. An LTV of 95% to 100% of FMV does not bode well. It's often wiser to sell the property at less than its mortgage balance.
Banks may or may not find an agent to help this process, because of the lack of true "profit" motive. You, as a potential buyer, however, may reap large benefits. For example, assume a home you like had an FMV of $275,000 a few years ago, but now has a down market value of only $225,000. The first mortgage balance is $221,000. Today, there is only $4,000 of equity at a current full price sale. You learn of this and make an offer of $216,000.
Mortgage loans, like this one, formerly around 80% LTV, are now at 98%. The lender estimates the cost of foreclosure at $15,000, after which they will need to incur further carrying costs (maintenance, insurance, etc.) until the home is sold. Unlikely to find an agent who is able or a buyer who is willing to pay around $236,000 for a property worth only $225,000 today, the mortgage lender allows a short sale. They accept your offer and you immediately begin with around $9,000 of equity, even at the depressed FMV.
As the market recovers, your equity should only increase. You will have completed a short sale and purchase. You'll have a reasonable mortgage loan balance on a home you like and in a market that should improve in the coming years, further increasing your equity and potential profit.
Be sure to do your homework. Learn about the true condition of the property, needed major repairs or upgrades, and other outstanding liens in addition to the first mortgage. You should factor in any serious deficiencies into your purchase offer. The bank should also be aware of any physical or title issues and will treat your analysis with respect and consideration. Looking for short sales on homes that fit your wish list may be very profitable and cost effective for you if you're a knowledgeable buyer.
More Real Estate Tips.
