Short Sales and the Preforeclosure Process

Terminology and a simple explanation

Negotiating a discounted payoff on a defaulting mortgage (Short Sale) is one of the most difficult concepts for many to understand.  Once you are able to wrap your mind around the concept, it becomes clear that the Short Sale (SS) is one of the most profitable Real Estate Investment vehicles available today!

To understand when the SS is a viable solution one must understand the foreclosure process.  Understand first that each state has their own foreclosure process and one concept in foreclosure that exists in my state may not work the same in your state.

Essentially, the Sheriffs Sale marks the foreclosure point.  If we are talking about Preforeclosure - this is the period before the Sheriffs Sale.  If we are talking about foreclosure we are talking about the actual Sheriffs Sale and the proceedings just after the sale - confirmation of sale and issuance of the Sheriffs Deed which conveys the property to the buyer of the property at the Sheriffs Sale.

During the Preforeclosure period the property must be purchased from the homeowner.  At the foreclosure [sale] the property must be purchased from the Sheriff.  After the foreclosure the property must be purchased from the buyer at the Sheriffs Sale (usually the bank).  If the property went back to the bank then the property is considered Real Estate Owned (REO) and the negotiations must be with the bank that now holds the deed to the property.

The best time for the investor to purchase the property is when it is in Preforeclosure.  The investor must negotiate with the homeowner, who must agree to sell the property to the investor for a price below market - usually the purchase price is whatever the investor can negotiate with the mortgage company (bank) as a discounted payoff.  This is much easier than it might look as many homeowners are in way over their head and the banks are very much willing to give a discount to quickly unload the non performing asset.

Some investors are able to get a good deal at the Sheriffs Sale, but this is not the norm as the bank makes the opening bid and it is based on what is owed to them which usually is much more than the property is worth.  There are exceptions where there is equity in the property and thus the bank owed amount is much less than the market value of the property.

Michael Hobach