Have you asked yourself what it takes to create Wealth as a residential real estate investor? The topic may be confusing or controversial, considering that we are bombarded daily with “miracle strategies” that promise millions overnight. While millions are never a guarantee, sensible acquisition of properties and a carefully executed strategy are. Most savvy investors know the best-kept secret: distressed real estate and its three categories: short sales, forced auctions, and REO’s. Now, which of these categories of distressed real estate are the ones that offer the best deals? Let’s break it down quickly and see what stage of the foreclosure process they will present themselves.
First, let us talk about short sales. Short sales happen when a homeowner can no longer afford to make the monthly mortgage payments along with the fact they may owe more than the home is worth. This is commonly referred to as being “underwater.” Under these circumstances, the lender is expected to accept less than what is owed and absolve the homeowner of their deficiency. Subsequently, there is potential value for both parties involved. The homeowner will exit without a foreclosure filed against them and still preserve all ancillary credit lines. It may also prevent a deficiency judgment and allow re-participation in homeownership much sooner than if foreclosed. There is a personal incentive and the peace of mind – psychological value and taking a proactive approach to the situation, taking control and preventing stress and uncertainty.
Most home shoppers may feel reluctant and try to avoid these kinds of transactions because of the length of time and the uncertainty of the outcome leaving less competition. Lenders, servicers, and mortgage insurance companies may have specific underwriting guidelines for accepting a certain percentage for the property’s appraised value. In turn, this leaves some measure of equity and value for the new purchaser. Also, lenders may make provisions for participation/relocation fees to homeowners. The owners participating in the short sale will usually occupy the home up until the closing point, leaving them in better condition and in need of fewer repairs. There is an incentive for the banks as well, as they save lots of money by avoiding a long and tedious foreclosure process and can recoup their returns much sooner rather than later. This platform is usually a win for all the parties involved.
Moving to the second category: the forced auctions bring a contentious, challenging situation for everyone involved. In judicial states, the homeowners may be years behind on payments. The lender will have been heavily invested in the taxes and insurance payments on the asset; furthermore, the delinquency amount is substantial, with the property being severely underwater. The upset price (starting bid) may not attract any takers. Some lenders may reduce the starting bid to attract offers, though potential buyers are wary because these are usually blind sales. The buyer would not have had the chance to inspect the property and must assume the worst. Also, these properties are sold subject to occupancy, violations, and any superior liens. Knowing that they will eventually lose the property, homeowners would not have performed any upkeep and can even create willful damage. This is where experienced investors will engage their expertise, ensuring a wide margin to compensate for all the potential hazards.
The third and last category: REO’s are bank-owned properties. These properties are usually “beat up” by the time it gets to this stage. The bank usually ends up with these properties upon the conclusion of the foreclosure auction. If no one finds the property or the price attractive enough at the referee/ sheriff auction, the property then reverts to the lender. In some states, this could be a grueling and a few years-long process. The lender may have to participate in a long eviction process of the occupants. These properties often appear as “Boarded up” by either the city/town or a home preservation company hired by the lender and are a potential epicenter for crime and vandalism. Lenders have to maintain a functional REO department to handle these properties, usually listed with local brokers. Potential buyers are typically advised that only “all cash” offers would be entertained. Banks will also acquire these REO’s from DILs (Deed in Lieu of Foreclosure). This is the voluntary return of the property to the bank by the homeowner. IN larger cities, abandoned properties usually accrue their fair share of municipal fines and violations. Therefore, it takes buyers longer to resolve the matter and turn them into properties with decent living conditions.
The most viable solution for all parties involved in capturing and recycling these properties at the earliest date possible, ensuring fewer expenses and the least amount of damage is done.
Collectively there is a win-win situation. The homeowners can avoid stress, foreclosure, and possible delinquency. The lenders are prevented from massive losses in accrued payments, escrow advances, and deteriorated assets. Subsequently, the residential court system gets relief from a lengthy foreclosure process. As a result, neighborhood values are retained, and community preservation is enhanced, offering opportunities for a peaceful transition and further growth and development. Being in the known about all these options is an asset: these are viable solutions with long term, sustainable gratification. Let’s build Wealth via educational tools and a great shot of empathy and transparency!