The Time is Right for Short Sale Investing

Most investors, I’ve found, are lazy people. That’s not a judgment mind you, it’s just an observation. And yes, I admit it, I’m lazy too. After all, if there’s an easy way to make money, why not take it? Admittedly, there’s a little bit of exaggeration in my comments, but not as much as you’d think. Sure, you always have to work to make money, but it gets easier as you learn to spot opportunities as the market changes.

I’m talking about short sale investing. Before 2007 when the housing crisis hit, short sales did exist, and you could make money with them, but they were enormously complex, the bank made you wait forever to close the deal, and negotiations were downright painful. Today, it’s different.

Short sale investing and the cloud’s silver lining

The dark cloud of the real estate disaster does have a silver lining, and it’s that (1) there are more short sale deals out there than ever before, and (2) they are a lot easier and faster to close than they used to be.

There are three perspectives to look at with short sale investing—the seller, the bank, and the buyer. From the seller’s perspective, they’re probably underwater and behind on payments, so they want out, and they want out quick. The market’s soft, so they can’t sell their house for enough money to cover the debt. They’re motivated to sell on just about any terms. The idea of turning any sort of profit has gone out the window, and all they want to do is make the phone calls stop. These are people that are looking for help.

Now from the bank’s perspective, they have an ever-growing collection of non-performing mortgages on their hands. They don’t want to foreclose and put the property in their REO portfolio if they can avoid it, because that’s costly. The bank has to maintain those properties, and pay the property taxes while they try to sell them off. The bank is eager to make a deal to get it off the books. What the bank does, when deciding whether to accept a short sale offer or not, is a simple comparison: Will they lose more money by foreclosing on a property and holding it for a year or more, or will they lose more money by forgiving part of the mortgage debt as part of a short sale? The decision isn’t a hard one, and given the current market, the short sale option is more frequently the one in which the bank will lose the least amount of money.

From the perspective of you, the short sale investor, it’s a perfect storm: Sellers desperate to sell at a deep discount just to be able to walk away, and banks willing to make deals and take a small loss in order to avoid an even larger loss.

How long will this opportunity be around? There’s no doubt, there will always be short sales, but the easy negotiation and startlingly high availability of short sale investing deals won’t last forever. We may be pulling (painfully slowly) out of recession, but the housing market took a big hit, and it will take years to recover. Five years from now the housing market is going to be in a much better position, and people who buy low on short sale today will be sitting on a lot of value in five years.

Tags: short sale investing, Short Sale Investor