Short Sales and What Opportunities Exist
Short sales were virtually non-existent prior to the real estate collapse caused by the subprime mortgage bubble burst starting in 2006 and culminating in 2008 with a global economic meltdown.
Short sale became more popular when millions of home in America were in foreclosure or facing imminent foreclosure. If a homeowner could not pay the mortgage payments on a home, a short sale would be a better result for the lender and easier for the homeowner rather than going through the full expensive foreclosure process.
The Small and the Big Picture
It is important to think about what caused the impetus for the explosion in short sales by looking at the dynamic forces that caused it from an individual perspective to the larger big picture or global perspective.
From the individual homeowner’s perspective, before the real estate market collapsed in the USA, they had a chance to buy a home, even if they really did not have the credit history or income needed to qualify for a traditional home loan.
Unscrupulous lenders participated in what is called “predatory lending.” By this we mean they created loans for millions of people who really should never have qualified for a loan. There was, in this hey-day of exuberant loan creation, a loan that was called a no income, no assets (NINA) loan and a no documents (No docs) loan. This means people could get a loan without providing any information about their income, assets, or even any documents.
The predatory part was that these loans started at a reasonable interest rate that seemed to be affordable, but then the interest rate would increase according to costs of money in the future. These variable interest rate loans could start at 5 or 6% and within six months they would be at 11 or 12%. The monthly mortgage payments on these variable rate loans could go up by double or triple, making it impossible for the homeowners to pay the monthly mortgage payments.
Rampant Foreclosures
Once the “house of cards” in subprime mortgage began to fall down, many of the holders of the titles to the properties soon to be under foreclosure realized it would be better to offer them at steeply-discounted prices from previous market values as a “short sale” than to acquire the property from a foreclosure.
There were plenty of reasons for this, which include:
- Selling a home that is not destroyed was easier.
- Getting people to leave a home by offering a “key” deposit made the transition to the new owner simpler.
- The cost of foreclosure and the extra legal expense was avoided.
- And most importantly the lenders did not continue to build up a large pool of homes that became less and less valuable as they deteriorated in value over time.
The Short-Sale Opportunity
Short sales still exist, but not in the numbers that happened in the years right after 2008. In a short sale, the lender that has a claim against the title to a property agrees to sell the property for less than the amount that they loaned on the property. These transactions can be an incredible bargain for real estate investors. However, the real estate investors need to have cash on hand to pay for the property to buy them at such a bargain price.
Summary
Real estate investors need to pay attention to short sales that are offered because they may find a real bargain in a short sale. The caveats are that a buyer must beware because often the purchase is all cash, without recourse (buying the property “as–is”), and with limited chance to inspect the property to determine the real condition it is in before buying it.
We are experts in helping real estate investors find these short sale and other kinds of excellent opportunities, so why not contact us at Acres Solutions today to see what we can do for you?