Short Sales

Following up on yesterdays introduction, I’d like to discuss a hot real estate niche going on right now – short sales.

A short sale occurs when a bank agrees to allow a homeowner to sell their house for less than is owed yet still consider the mortgage paid off.  This is a great solution for everybody involved and here’s why:  The homeowner gets out of their upside down mortgage and get to start new without the blemish of a foreclosure on their record.  The bank saves itself the hassle and cost of the foreclosure and auction process.  The bank also, importantly, no longer need to carry reserves against the defaulted mortgage – enabling the banks to lend higher amounts of money for the same amount of cash it has on hand.

The community is also a big winner in a short sale.  When a person who can’t pay for their mortgage is replaced by someone who can pay for their mortgage the result is a more stable household.  More stable households create more stable neighborhoods.  Stable neighborhoods have less crime and create a higher quality of life for the people in them.  Naturally, potential home-buyers will be willing to pay more for a property in a stable neighborhood than an instable neighborhood.  Related to this is an interesting statistic mentioned in the New York Times that half of all foreclosed homes are ransacked by either former owners or vandals.

Lastly, short sales are very lucrative for the investor.  In a short sale it is possible to create your own market with a seller (the bank) who also happens to be very motivated due to the reasons mentioned above.  Additionally, there is (if done right) no competition from other investors, which means there can’t be any bidding war.  The deal is between the bank and the seller and if they agree with your rationale – or even if they  think you aren’t too far off they will go for it.