In a market full of mortgages going into default, a lot of real estate investors are never sure which way to go to get the best deals.
Do you get foreclosed REOs from the bank? Do you do short sales to buy the houses for less than the mortgage balance? Or do you stick to buying houses directly from motivated sellers?
This article sheds some light into these 3 situations.
These 3 methods all have their pros and cons; let’s analyze each one:
1) Buying foreclosed houses from banks – REOs
Banks have a lot of inventory in foreclosed homes and they seem to be piling them up every day. As soon as they foreclose on them, their next step is to put them back on the market to sell them.
There are few buyers, and these properties can sit on the market for a very long time and still get no buyers.
Banks are therefore willing to sell them less than their market value, even more so if they need repairs.
As a real estate investors, shop carefully for good REO deals because not all them will meet your buying criteria or equity argin for you to make a profit.
2) Short Sales
If a home owner is behind on their mortgage, the bank eventually forecloses on those homes. Before they foreclose, they are often willing to take less than the mortgage balance. This negotiation is called a short sale.
Typically, a bank will do an appraisal to know the exact value of the home. Then they can give you a discount on the mortgage based on their numbers.
A bank that holds a first mortgage is likely to offer very little discount on the mortgage, usually not more than 20% especially if it does not need major repairs.
A bank that holds a second mortgage can lose 100% of their investment in a foreclosure, so they are more willing to negotiate much lower. It is not unusual to get 80-90% discount on a second mortgage.
It therefore makes a lot of sense to do a short sale on a property with more than one mortgage.
Short sales can also take a long time, usually 3 to 6 months. You must therefore have enough patience and capital to last you through such long waiting periods.
Banks can also turn down your request even when all numbers look good. You must therefore be ready for rejection.
Lastly as in REOs, you must close fast as soon as your short sale is approved. Banks will not accept creative financing on short sales.
When all is said and done, you can create a lot of equity and profits as long as you select the right deals, have patience to wait for a long time, can take rejection and you can close fast.
3) Motivated sellers
There are so many ways to buy houses straight from a motivated seller depending on their situation. This includes creative financing.
You also get the flexibility to negotiate easily if the mortgage balance allows, and you can be as flexible as you need when closing, e.g. you can wholesale a deal right from a motivated seller to a wholesale buyer.
This is always the best way to buy investment houses as long as you can target people in need of selling their houses.
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Tags: motivated seller, real estate investing, real estate investing website, real estate investor website, short sale REO