Short Sales: More Reward for More Effort
Yes, you can increase your profit margin if you are willing to spend more time to negotiate foreclosure.
What is short sale?
Homeowner: cannot pay monthly mortgage installments but does not want foreclosure or eventual bankruptcy.
Lender/bank: knows recovery of loan is impossible so agrees to get paid for an amount less than homeowner owes.
Other creditors, if any, who loaned to the homeowner but know that they cannot get their money in full.
You: offer lower-than-market value to buy the property.
Homeowner avoids foreclosure or potential bankruptcy. Because lender agrees to get paid an amount less than the loan amount, he/she is better off. Bank is happy to save time and additional cost by not foreclosing the property.
Other creditors are happy as they would get nothing or little if there was a foreclosure sale (junior liens are wiped out with the foreclosure sale). You buy a property at a price much lower than market price. Everybody is happy after the short sale.
Who is the primary actor in short sale?
You! You orchestrate the whole deal with the help of the homeowner, lender/bank, and any other creditor, if any.
Agreement with homeowner in short sale
Depending on whether there is an equity in the property, you need to make an offer to the homeowner. If there is no equity or negative equity, you may need to pay for moving expenses, and perhaps some money for the homeowner to pay for first month's rent or security deposit in a new home.
Agreement with bank in short sale
You ask homeowner's permission to talk to his/her bank to negotiate on the total amount that bank wants to get paid without going to foreclosure. Bank knows the additional costs of foreclosure and time involved. With a nice discount, you agree to buy the home at a nice discount (profit). Bank also saves money by avoiding foreclosure. More importantly, bank gets liquid assets in a short period of time by not going to foreclosure.
Agreement with other creditors, if any, in short sale
It is quite possible that homeowner may have resorted to additional borrowing by using his/her home equity line of credit (second and even third mortgage). If this is the case, you need to pay some money to these creditors. But you have a great leverage in your negotiation: these creditors will get nothing if bank goes to foreclosure as their junior liens will be wiped out ... they will get nothing. So, you convince them to drop their claims by offering them some reasonable amount of money after using some foreclosure negotiation tactics.
Even if the homeowner borrowed from the same bank for equity line of credit, the bank knows that it will not get more than market price of the property. Bank will have to incur legal expenses and other costs to sell the home at foreclosure sale. Doing a short sale is to the benefit of the bank to recover large portion of its money in a short time.
Short sale requires more efforts and more profit
Of course, buying home in short sale requires more effort as compared to buying it directly from the homeowner, bank, or at foreclosure auction. But, you make more money by dealing with all of the parties involved in a short sale.
Once you streamline one short sale, it becomes a routine operation for you to do the second and more short sales in the future.
Who benefits more in short sale?
Short sale benefits all sides. Homeowner avoids foreclosure and a possible bankruptcy. Bank saves time and makes some sacrifice to recover its bad loan in a short time and have liquid assets again. And, you make money by holding or flipping foreclosure or foreclosure repair.
Short sale in different states
Every state has its own foreclosure practices. Some states have judicial foreclosure procedures and some have nonjudicial foreclosure sale system. Bank has to go to the court to sell homeowner's property in judicial (mortgage) system while bank has the power of sale in states applying non-judicial system.
You are in a better situation to negotiate with the bank in states having judicial (mortgage) system that takes more time and effort to sell the property. This does not mean that you cannot cut deals in nonjudicial states. In both cases, banks are in trouble.
Listing of states by foreclosure system affecting short sale process
States applying judicial (mortgage) system:
Alabama, Arkansas, Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Washington, Wisconsin, and Wyoming.
States applying nonjudicial system:
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Maryland, Mississippi, North Carolina, Oregon, Tennessee, Texas, Virginia, Washington, D.C., and West Virginia.
Georgia applies security deed system.
Please check updated information on most recent status of foreclosure law in your state. Also note that some states and some banks in the same state may have home mortgage loan agreements different than those applied by other banks and lenders.