Understanding And Purchasing Distressed Property For Profit

According to the the latest Foreclosure Inventory Analysis showed nearly 1.5 million properties were currently in the foreclosure process or being held by banks as Real Estate Owned.

This was up 9 percent from the first quarter of 2012, but down significantly from the apex of foreclosure activity -- 2.2 million units -- in December 2010.

What Is Distressed Property?

"Distressed property" is a blanket term for homes in foreclosure, short sale or that are REO (Real Estate Owned).

Below are definitions of different types of distressed real estate, so that you can be familiar with the terms.

• Foreclosure: When a homeowner has defaulted on their mortgage for a specified period of time, the bank takes possession of the real estate.

• Short Sale: A homeowner facing foreclosure may request a short sale from their lender to sell the property for less than what is owed.

• REO: Real Estate Owned properties have gone through foreclosure and are held by the bank. This increases the possibility of purchasing these homes at a discount because maintaining an REO is costly for a lender.

All three scenarios offer opportunities for substantial savings, yet all include stipulations with regard to the contract and terms of purchase.

Special Requirements With Distressed Property Purchases

When you buy this type of property, you are dealing with a financial institution instead of a private seller, so it may take more time to get to the closing table.

Be prepared for a longer than normal communication cycle as there are often delays when working with the bank or mortgage lender to come to a decision on an acceptable offer and closing date.

Unfortunately, many distressed properties have more deferred maintenance and repair issues

If you are willing to take the chance and be patient, a distressed property could pay off in terms of a lower purchase price.

Additionally, most buyers of distressed properties see an increase in the value of their real estate within a short time of purchase.

In the end, it is strongly advised that buyers work with an experienced property expert when interested in distressed properties because of the additional paperwork and requirements to complete the transaction.

Short Sale : Writing A Letter Of Hardship

A short sale is when a property is sold for less than its remaining mortgage principal balance, and executed as a way for both the existing homeowner and mortgage lender to reduce their respective losses.

Typically, although not always, short sales are reserved for situations of extreme financial hardship; just prior a bank beginning foreclosure proceedings.

Short sales are not automatic, however. Homeowners must often prove the merits a short sale to their lender, which often involves documenting that selling the home for less than its worth is the best and most viable option for all parties involved. 

The short sale process starts with a letter of hardship.

To prove your short sale worthiness to the bank, you'll be asked to submit a cover letter which explains your hardship, and to provide full financial disclosure. You will also need your original purchase contract, a balance sheet of your income and expenses, your asset statements and proof of income, and two years of federal tax returns.

Lenders prefer handwritten letters and are more apt to agree to a short sale for homeowners who may have lost jobs or encountered significant medical bills, as opposed to those who engaged careless spending.

Draft a compelling letter and avoid extraneous details. Be short, be thorough, and be complete.

In addition, note that the following traits can help speed your short sale approval : 

• The home is marketable
• A second lien holder, if one exists, is amenable to short sale proceedings
• A foreclosure is not scheduled within the next four months

Choosing to short sale your home , though, is not something which a homeowner should pursue alone.

The process of selling a home in a "distressed" state is significantly different from selling a non-distressed home. Homeowners selling in a short sale should seek the advice and counsel of an experienced real estate agent.

Foreclosure Activity Drops Throughout The Most Foreclosure-Heavy States

Foreclosure activity is slowing. According to foreclosure-tracker RealtyTrac, the number of foreclosure filings dropped 17 percent on an annual basis last month. Monthly filings ticked higher 1 percent after a combined 23 percent decrease through November and December 2010.

The phrase "foreclosure filing" is a catch-all term, comprising default notices, scheduled auctions, and bank repossessions. 

January marked the third straight month of sub-300,000 filings after 20 straight months above it.

As compared to January 2010, six of the nation's 10 most foreclosure-heavy states posted an annual foreclosure filing reduction. The remaining four showed modest worsening.

It's noteworthy that states like California and Florida posted declines of 7 percent and 54 percent, respectively, and that Nevada posted a relatively-low 3 percent gain. These three states have been at the leading edge of foreclosure activity since 2007. Their subsequent recoveries, therefore, may foreshadow a better housing market ahead.

Or, this may be lasting effects from the "robo-signer" controversy.

Regardless, home buyers continue to clamor for distressed homes.

According to the National Association of REALTORS®, properties in various stages of the foreclosure and short sale process are selling at discounts in the range of 10-15 percent so it's no wonder they now account for 36 percent of all home resales. Buying a foreclosure can be a great "deal".  They can be more trouble and cost than they're worth.

Therefore, If you're in the market for a foreclosed home , be sure to speak with a licensed real estate agent. The process of buying a distressed home is different from buying a non-distressed home. An experienced professional can help make sure you negotiate your best possible price.