Short Sale OR Foreclosure? Which One is Best?

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According to the Federal Deposit Insurance Corporation (FDIC) and Mortgage Bankers Association, one in every 200 American homes will be foreclosed on. That means one in every 200 families across America will be forced out of their homes because they cannot afford to pay the current mortgage payment. With economic times fluctuating, some families are choosing to leave their homes before a foreclosure process takes place. If done properly, homeowners can use a short-sale to secure a financial future and sell a house which they can no longer afford.

What is a Short Sale?

When choosing a short sale, the seller of a home arranges with the mortgage company to sell the property for less than is owed on it. The lender will forgive the remainder of the loan in a typical short sale approval. Why would a seller do this? The cost of a lengthy foreclosure proceeding and months of lost mortgage payments are most often offset by the selling price of a short sale property. Lenders will sometimes agree to the terms of a short sale to ensure they are getting most of the money owed to them. A short sale will still negatively affect the seller's credit rating and is not always approved by the mortgage company of a property.

What is a Foreclosure?

In a foreclosure, the homeowner may be trying to sell the home but has been unable to. After four to six months of not receiving a payment from the homeowner, the mortgage company will initiate the foreclosure proceedings. Most mortgage companies are extremely flexible in making payment arrangements and working with homeowners to help them get caught back up on the money owed.

When arrangements cannot be made, the mortgage company starts the litigation process of taking back ownership of the home. This will involve official warnings through the mail, certified notices delivered by the local sheriff's department, and eventually will end in the bank evicting the homeowner and the bank becoming the new owner of the property.

The Benefits of Short-Sale Buying

Investing in short-sale real estate can net huge returns if you have the finances in place to make cash purchases, or pre-approved financing purchases very quickly. Homeowners are often selling their homes for less than the home is worth in hopes of quickly getting some of the equity out of the home so they can move onto a different purchase.

As an investor, you can maximize your investing dollar by doing research to determine the percent of loan forgiveness the homeowner's mortgage company has historically been willing to commit to. For example, If ABC Mortgage company has a history of agreeing to short sales with 20 percent of the loan being forgiven, that would be useful information to you. When negotiating an offer with the homeowner, the lower you can get the homeowner's price, the more money you will potentially make from the transaction.

Benefits of Foreclosure Buying

Investors who do not like to negotiate or deal with homeowners will enjoy foreclosure buying much more than short-sale purchasing. A home in foreclosure will be available at a lower cost than a short sale, you will not likely have to deal with a current homeowner and the only negotiation you will have to do is at the auction for the property. The downside to investing at this late stage in the real estate sale process, is that many of the homes are in need of repairs by the time they reach a foreclosure sale. Sometimes the homeowners will even purposely vandalize their homes before being evicted. The other important thing to remember about foreclosure investing is the finances associated with these purchases are almost always cash.

How to Choose the Best Investment Strategy

The type of financing you have available may automatically lend itself to the type of investing you will be able to do. If you do not have cash on hand, it is difficult to purchase foreclosure properties. If financing is not an issue, it will be important to analyze each property for the potential profit based on the purchase price, repairs, and rental or sale income you expect to get from the property.

For maximum profit, foreclosures are the best investment. For maximum stability in a purchase, short sales offer the most information about a property to make a good informed decision before purchasing. Many investors are finding a good residual income base can be formed from renting out short-sale and foreclosure properties since the real estate buying market tends to be so volatile during economically hard times.

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