Of the real estate market's distressed-property acquisition opportunities, foreclosures and short sales seem to be two of the biggest. While offering plenty of monetary rewards, these are largely opportunistic in nature, carrying an inherent degree of risk and difficulty. Knowing how both the foreclosure and the short sale processes operate is important for an investor or homebuyer to work his way through all the intricacies involved in acquiring distressed properties.
Foreclosures: Opportunities and Risks
Foreclosure occurs when a borrower defaults on his or her mortgage, and the lender takes over the property. The foreclosed property is mostly sold through auctions or estate agents below the cost price. As such, this presents an attractive opportunity to buy such discounted property and realize handsome returns by way of its sale or letting.
Opportunities: The most prominent benefit of buying a foreclosed property is that it will help you save tons of money. Foreclosed properties are mostly sold at a discount price compared to other available market prices, thus helping an investor to buy the real estate below the market price. Moreover, foreclosed properties can easily appreciate in value if located in a decent location and after proper renovation or management.
Risks: Though there is the potential for benefits from purchasing foreclosures, there are considerable risks involved. Most foreclosed properties are sold "as-is," which means hidden defects or maintenance problems not readily apparent during an initial inspection are left to the buyer. Foreclosure typically takes a long time and may be accompanied by various legal and financial pitfalls into which buyers should proceed with great caution. Buyers may further face intense competition from other investors or cash buyers competing for the same property and raising the final purchase price.
Short Sales: Opportunities and Risks
A short sale is a situation when a homeowner sells their property for less than the outstanding mortgage balance, with the agreement of the lender. This process is usually started by a homeowner who cannot keep up with the payments but wants to avoid foreclosure. Similar to foreclosures, short sales can present opportunities for buyers to acquire properties at below-market prices.
Opportunities: One advantage of short sales is that, for the most part, the condition of the property is nowhere near as perilous as what might be experienced with foreclosures. As the owner is still living in the home, it will likely be taken care of and in better shape. With a short sale, there may also be a little more latitude to negotiate with the seller, which could mean better terms for the buyer.
Risks: A short sale is a time-consuming and complex process. It needs to be approved by the lender, which can take even months and sometimes requires a lot of paperwork to be done. In addition, it is not necessary that the lender will agree to the sale, thus keeping buyers at bay. A lengthy negotiation process comes with short sales, and the final amount of the sale may still be subject to what the lender wants and what the market conditions are at that time.
Due Diligence and Strategy
In both cases, in foreclosures and in short sales, due diligence must be done carefully. Buyers should carefully inspect properties, assess market values, and understand the financial implications of their purchase. Working with an experienced distressed property knowledgeable real estate professional gives a buyer valuable insights and assistance throughout the process.
Buyers and investors must also be financially prepared and by their risk tolerance. At times, distressed properties may require additional investment to repair or renovate the property; hence, it is very important to understand the full scope of probable costs that may be incurred in order to make an informed decision.
Conclusion
Foreclosures and short sales provide opportunities to acquire distressed properties at possibly very low prices but also come with great risks and challenges. Masters of the dynamics of such processes, with thorough due diligence and experienced professionals to guide, the buyers and investors can understand the complexities of the distressed real estate and make the relevant financial decisions. The potential rewards should be weighed against a very clear understanding of the risks involved in ensuring a successful investment strategy within the realm of distressed properties.
