For a real estate investor looking for a steady income on his rental property, acquiring a short sale or property via foreclosure was a lucrative yet not a feasible option until recently.
Foreclosure and short sales were terms we did not hear much about until recently. The reason was because a home owner typically used to make a 20 percent down payment when purchasing a real estate property. For a property to lose 20 percent of its value was not a common occurrence and hence foreclosures and short sales were not common.
About a decade back with changes in mortgage underwriting rules, loans were encouraged and given with zero down payment. The belief was that homes never lose value hence it is okay to give out loans with zero down payment. As house prices rose, homeowners re-financed to a higher mortgage with the new value and still owed almost 100 percent of the amount of the new value of the loan. What made the situation worse was that on top of not putting any down payment, homeowners took out variable rate loans, for a very low rate.
When house prices started to show signs of softening, people got alarmed looking at their high mortgage payments and lower house value. They could not refinance to a lower house value and their monthly mortgage payments were still quite high. This led to people panicking and defaulting on their loans and going to foreclosure. Foreclosed properties typically sell for a lower price than an equivalent regular sale.
Initially banks were not prepared to deal with this flood of short sales. However, this reality needs to be faced. Home Affordable Foreclosure Alternatives (HAFA) program has streamlined the process for those dealing with these situations.
Short sale is a process where a bank agrees to sell a property for an amount lower than the current loan on the house. If a home goes to foreclosure, it is typically more expensive for the bank, hence recently they have become more agreeable to the short sale process. A foreclosed home is sold free of any liens, just like a regular home. A short sale, however may have other hidden factors and typically takes much longer time to close, possibly three to six months.
Investors were afraid to touch foreclosures or short sales due to the length of time it took to complete the process of acquiring a distressed property. With HAFA program in place, the time duration and the process for acquiring a distressed property is more predictable. This then becomes a more lucrative option especially in those states where the difference in prices of non-distressed to distressed homes is larger.
