How to Buy Real Estate for a Fraction of the Market Price

The real estate world is one of many different opportunities. Money is made or lost based on this fact. The rich understand this and know how to take full advantage of the laws that apply to the real estate world. Because these laws are public knowledge, anyone who wants to benefit from them can, if they are willing to take the necessary steps. This is an article geared to walk you through the arena of a short sale, how it works, how you can profit from it, and some advantages and disadvantages.

What is a Short Sale?

With the market being flooded with foreclosures, short sales are becoming more commonplace. In a short sale, you deal directly with the lender and negotiate to discount the mortgage and buy the home for less than what is owed. Once you have negotiated and closed the deal with the lender, you are free to sell the property on the market at a discounted price or purchase the home outright for considerably less than the fair market value. This is a win-win scenario for everyone. The homeowner usually avoids a foreclosure on his credit, the bank gets rid of its "bad loans," and you are left with a home that was purchased for pennies on the dollar. Here is a real life scenario of a short sale deal. Let's say Mr. Homeowner's mortgage is two months delinquent, and his property is in jeopardy of foreclosure. The amount owed on the mortgage is $100,000. His property was appraised for $105,000, and the other homes in Mr. Homeowner's neighborhood have been selling from $90,000 to $120,000. Now the lender is willing to discount that $100,000 payoff. So you make a new offer of $50,000 and negotiate with the lender until a new pay off amount is agreed upon. If the lender agrees upon your initial offer, you will have created $55,000 in equity based on the earlier appraisal of $105,000. Even after closing fees, lending fees, lawyer fees, and taxes you will still have a very nice profit.

Who Benefits from a Short Sale?

Typically, everyone will benefit from a short sale to some extent. Granted, the homeowner is going to have to search for a new place to live, but you have helped him by saving his credit. Is this always the case? Not necessarily, but sometimes it can make the difference between that individual being able to buy a home or being forced to look for other options. Now if the homeowner has any equity in the home typically they will be able to walk away with some money in their pocket. For example, a particular property appraises at $200,000 and the homeowner's first mortgage is $150,000. This means there is $50,000 equity in the home. Let's say that you make an offer of $170,000. The homeowner would be able to walk away with $20,000 in his pocket.

The banks benefit as well from this type of sale. They lose some money on their investment, but typically it prevents that bank from having to deal with any upkeep on the home while it is waiting to be sold, paying a realtor, or messing around with any major overhauls that may need to be done. They also get rid of a bad loan.

The third party in this group (you) is going to be the real beneficiaries when it comes to this kind of a transaction. You will have not only helped the homeowner and the bank, but you will have the benefit of owning a home for pennies on the dollar!!! There are very few other methods to be able to get into a home this cheap. This is your way to take full control of the property. What you do with it from there is has unlimited possibilities. You could do a lease-to-own, land contract (you become the bank), or just sell it outright and cash in on the opportunity.

What's the Catch?

Many homeowners will want something out of the deal. However, what they are getting is a new beginning in life, without the blemish on their credit or the mental anguish that a foreclosure can leave when they go to buy a new home. Sometimes the homeowner can be persistent in wanting some money for the house. Some people would rather have the property foreclose than to have someone else profit from it. If that is the case, it is recommended that you just move on. But remember that there are a lot more people out there with whom you can work. Sometimes the bank will not want to take a loss on the mortgage if they believe that they can do better by foreclosing on the property. In some cases the bank will attempt to get the homeowner to try to refinance the loan so the bank does not have to take such a hit on the loan. In scenarios like this the prospective buyer(you) might be tied up for several months waiting for the bank to accept the short sale agreement only to find out the bank is not willing to move forward, putting the buyer out for the cost of the inspections and possibly a deposit to start the process. Because of this you can expect to only receive about one in every four offers that you make. Sometimes this can be a little trying on your patience and your pocketbook, but any business opportunity has its drawbacks.