QUESTION: I'm hearing a lot about short sales and given the number of foreclosures I see in the newspapers, I'd like to know more. What's the difference between a foreclosure and a short sale? Is this an investment opportunity?
ANSWER: A short sale happens when the lender is shorted on a mortgage. This means the lender accepts less than the total amount that is due. This is nothing more than negotiating with lien holders a payoff for less than what they are owed, generally on a piece of real estate, short of the full debt amount. Lenders have a department, typically called a loss mitigation department, that processes potential short sale transactions. A mortgage holder will only agree to accept less than what is owed if the situation is dire, the only option is foreclosure and the losses generated by foreclosure costs would be greater than a short sale.
There are investors who recognize money to be made in this market, especially in the pre-foreclosure phase. Pre-foreclosure is where the homeowner can minimize additional damage to his credit if the home may be transferred at a mutually-agreed-upon price before it is necessary to get the lender involved. Potential leads to locate a property at this stage may come from networking with real estate agents, attorneys and accountants.
Properties in the early stages of foreclosure can be identified through the County Clerk's office. Find out where the notices of default are filed and determine how to sort through the general index to discover pending foreclosure sales. You may also be able to request that your address or e-mail address be placed on an advance notice list or a list of pending defaults.
When the foreclosure process is complete the lender may have taken control of the property or it may be in the hands of an investor who has already purchased it at auction. Refer to the foreclosure notice to determine the name of the lender and the balance owed on the mortgage. Lenders are typically extremely willing sellers. Banks do not want real estate to appear on their financial records. It the property ends up in the hands of a private investor, rather than with the lender, you may still be able to acquire it on your own or with the help of a real estate agent. However, the price at this point may not be rock bottom.
A key strategic decision to make is where to enter into the foreclosure process. Some choose to become familiar with the auction process and enter there. Others wait until the foreclosure process is complete. Some ferret out mortgagees in trouble and step in early. If you find someone in the very early stages but the proverbial default "writing in on the wall" the lender might agree to a short sale that could result in a good investment.
Attorney Sylvia Heldreth is a certified specialist in real estate law. Her office is located at 1215 Miramar St. in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.