GIMME SHELTER- Short sights: Can you make money in foreclosures?
Q: I hear a lot about the increase in foreclosures, both nationally and locally, but I'm confused by all the terminology and the processes involved. For example, what is a pre-foreclosure or a short sale?
A: I've been reading and hearing a lot lately about foreclosures, pre-foreclosures, short sales, and everything in between in our market. It's a complicated issue, and many realtors and even real estate attorneys are still climbing the learning curve...some more successfully than others.
I've also seen and heard on local talk radio members of the general public discussing the issue, and a tremendous amount of confusion exists there as well. The process is convoluted, often excruciatingly slow, and often leads nowhere, at least from a potential buyer's point of view.
The television and internet advertising boasting huge profits and "buy a house for $300" doesn't help either, of course. I've had some success putting together short sales for my clients and my own portfolio, even more in pre-foreclosure situations, and very little at the foreclosure auction stage. Here's what those terms mean to me, and why I think things have worked out as they have.
Pre-foreclosure: A property still owned by the seller, but in a situation where payments are in arrears. If some equity still exists in the property (the difference between what is owed and what a buyer is willing to pay), this can be a good deal for all concerned.
Short Sale: A property that does not have enough equity to pay off existing obligation(s) and thereby deliver clear title. This is a case where the buyer, seller, and the existing lender(s) must all agree to a sales price, even if it does not fully satisfy the lender(s). Difficult, but not impossible to bring to a successful settlement.
Foreclosure: This is the auction process by which the primary lender attempts to obtain clear title to the property by wiping out secondary liens and obligations or accepts a bid that pays all or part of what it is owed.
Buying/bidding in: Here is the most misunderstood part of it all. Often, the lender will instruct a trustee to make a bid on its behalf that is near the amount it is owed, in hopes that someone will bid higher so they will be made whole. Or the lender hopes that once it has clear title, it can take back the property and resell to mitigate the loss. (Seems a little short-sighted to me if it bears little or no relation to fair market value, but it's clearly their right.)
Some have alleged that banks profit using this tactic, but I can't think of a single example locally in which a bank actually made money this way.
For one thing, any excess after paying off the debt and the cost of the sale would belong to the former owner. Another factor is that there are accounting and even some IRS issues that go along with such conveyances, and the lender rarely comes out ahead.
The bottom line is that the lender– who isn't the bad guy– very rarely is interested in owning the property and would be delighted just to break even.