Are you looking to profit from the poor real estate market? If so, you will find a lot of tips and information online. Most “professionals” encourage you to target foreclosures and foreclosures alone. Yes, foreclosures have the potential to bring in significant profits, but so do short sales.

What is a foreclosure short sale? It is when the property in question will soon enter into foreclosure. The borrower fell behind on their mortgage payment and does not anticipate a solution in the near future. The property is sold for less than the outstanding mortgage. Not all lenders agree to short sales, but it is becoming a common practice. Short sales enable lenders to bypass the cost, time, and hassle of foreclosure proceedings. They lose money, but they do recoup some. Unless a lender knows a foreclosure auction will bring in more cash, they typically opt for a short sale.

As nice as it is know about short sales, you may wonder how the process got started. If you know a home seller is trying to avoid foreclosure, you may wonder if suggesting a short sale is a viable option.

As previously stated, short sales result from a borrower’s inability to pay. This is the first stage. The homeowner loses their job, receives a pay cut, loses money from the stock market, or had and another unforeseen financial complication. First, borrowers will approach their lender for help. This may include refinancing or a reconditioned loan. If denied, a short sale is the next option.

A borrower cannot decide on a short sale themselves. They must receive approval from their financial lender. This is not always easy. The borrower contacts the mortgage lender to see if a short sale is even a possibility. If it is, documentation is required. Mortgage lenders send various forms for borrowers to submit. The most important is an authorization lender for personal information. The price of a short sale property is determined by the outstanding mortgage. All prospective buyers will see your name, your address, the amount due on your loan, and so forth. The bank needs permission before disclosing this information.

A letter of authorization does not mean the short sale was approved. It is just one of the many stages. Next, most lenders require submission of income, assets, and a hardship explanation. Those who fell behind in their mortgage due to unforeseen circumstances, such as layoffs, as opposed to criminal activity, are likely approved. Mortgage lenders only use short sales when necessary. They discourage borrowers from using it simply as a way to avoid paying for their home.

Documentation of assets and proof of income is used to determine a borrower’s financial standing. As previously stated, lenders use short sales as a last resort. If these documents prove a borrower can no longer pay their bills, a short sale is likely.

The final foreclosure short sale step, which involves listing the property for sale, depends on the lender in question. Some opt for in-house selling and others turn to real estate agents. Regardless, once the lender agrees to a short sale, the property is listed for sale almost immediately.

So, there you have it. That is how a short sale property becomes. Unlike buying foreclosures, there is little to no risk of disgruntled property owners. These individuals agreed to a short sale. As a buyer, this not only means you get a home for a great price, but you should get a well-kept home with occupants who will not put up a fight to leave the property. After all, a short sale was likely their idea.

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Here is the scenario, you see a great home available for sale. The price seems a little high, but it still looks like a good value. You think buying would be an easy way to turn a profit or buy a cheap first home. After a little bit of research, you see or hear that the home is nearing foreclosure. What do you do?

The first thing you should do is contact the real estate agent selling the home. If the home is being sold by the owner, schedule a meeting. See the home and inspect it for your own eyes. If satisfied with what you see, ask to do a professional inspection. If you are truly getting a good deal, make an offer. If you feel the asking prices is too high, make a lower offer. If the home is entering into foreclosure soon, the homeowner may be willing to work with you. After all, they are selling their home to avoid foreclosure. But, you may run into a problem. The homeowner may be unable to lower their selling price, due to the outstanding mortgage due. So, what do you do? You ask about a short sale.

Not all borrowers, even those nearing foreclosure, are familiar with short sales. Unfortunately, many believe their only two options are to sell the home or enter into foreclosure. Borrowers actually have many options, starting with refinancing, reconditioned loans, and short sales. If a homeowner plainly states they cannot lower their selling price due to their mortgage, ask if they have considered a short sale. If they are unfamiliar with the process, they may ask you for more information.

A short sale is when the borrower and mortgage lender agree to sell a property for less than the outstanding mortgage due. Borrowers who suggest short sales want to avoid foreclosure. They want their credit to suffer little damage. Mortgage lenders also want to avoid foreclosure. Proceedings are long, full of hassle, and costly. The worst that can happen is the borrower or lender will say no. You have nothing to lose, so why not offer the suggestion to the borrower and current seller.

For a mortgage lender to accept a short sale, the borrower needs to prove they cannot afford their payments. They do this by submitting proof of income, assets, and a hardship letter. This hardship letter details the reason they are in debt. It may be due to health complications, job loss, reduction in pay, or an adjustable rate mortgage. If a mortgage lender is open to a short sale, these documents will be sent to the borrower.

When suggesting short sales to soon-to-be foreclosed persons, it is important to not give them false home. Lenders reserve the right to say no. Also, depending on the lender in question, they may be required to pay back the difference. For example, if the outstanding mortgage is $75,000 and if you buy the home for $65,000, they may have to pay back the $10,000 difference. Some lenders do forgive this debt and others will set up affordable payment plans. Your best takers for short sales are borrowers who don’t want to damage their credit or declare bankruptcy.

If you are prepared to buy the home if a short sale is accepted, work with the borrower. When they submit their documents for approval, submit a acquire offer. When all documents are submitted together, mortgage lenders are more likely to approve. There are no guarantees that short sale properties sell. Mortgage lenders not only take a loss, but they take a risk. A acquire offer can sway them to a yes.

With the struggling economy and home foreclosures at their highest ever, those of you who are in the market for buying a new home for yourselves or as an investment have unprecedented opportunities to save. Even if you are limited as to how much you can spend, you might be surprised at how much you can save on pre foreclosure homes (also referred to as default homes). Here are some pros and cons to consider when purchasing these types of properties.

The easiest part of the whole process is finding pre foreclosure homes. You can locate these on the internet through local listings (as by law they must be listed publicly) or on one of the many sites that are specifically designed to help those who are searching for homes in the foreclosure or pre foreclosure process. While it is easier to find foreclosures, one of the benefits of zoning in on a pre foreclosure is that you would probably be able to move into the house fairly quickly because not enough time has passed for the house to go into a state of disrepair.

Another advantage of purchasing a home in the default or pre foreclosure phase is that, often, the homes are actually listed by real estate agents. So, you would go through the “normal” home-buying process instead of having to deal with a possibly lengthy foreclosure hassle. In the pre foreclosure stage, you can actually take a look at the house and communicate with the home owner through the real estate agent. You do need to keep in mind that the homeowner will most likely be upset about being forced to sell his/her home. That is why buying a pre foreclosure through a real estate agent can turn into a real advantage.

Be aware of the negative aspects of buying a home in the default stage as well. maybe the biggest one is that you will not get a huge discount on the property as you may get in actual foreclosures. Usually the realtors handling pre foreclosures will list the homes closer to assessed value compared to those properties that are listed privately. Remember that a portion of the buy price goes into their commission, so it’s only natural that they will attempt to sell for as much as possible. Evaluate your bargaining power as well when you are discussing the deal with the agent/homeowner.

In general, pre foreclosure homes are on the inexpensive side, but you will most likely save more if you negotiate directly with the seller. Here time is on your side because homeowners that are suffering through pre foreclosure stage are under a great deal of pressure to sell before their home enters foreclosure. If their house does end up being seized by the lender, their credit rating will take a serious hit. And some homeowners may offer you an apparently too-good-to-be-true deal just to clear up their debt before they actually lost their home. The obvious disadvantage in this situation is that dealings with the upset homeowner will probably not be pleasant.

With the current state of the economy and the real estate market, many individuals are holding off on purchasing a home. On the other hand, you will see that professional investors are buying up properties as soon as they hit the real estate market. These properties are either foreclosures or short sales. Why do they do this? Because they are able to make a profit.

If you want to become a first-time investor, target short sales. Why?

1 – It Is a Great Starting Point

As previously stated, professional investors are buying foreclosed properties and often in large amounts. As a first-time investor, you may find foreclosure auctions to be intimidating. You are in a room with hundreds of foreclosed properties for sale, but also hundreds of experts in the field of investing and real estate. To get started, try foreclosure short sales. It is less intimating.

With foreclosure short sales, you deal directly with a real estate agent or the mortgage lender. Yes, others may be competing for the same home or property, but you will not have to meet with them face to face or go through a rigorous and fast-paced auction.

2 – You Get a Good Deal

Short sales are a foreclosure alterative. Foreclosures appear on credit ratings for at least 7 years and most borrowers later find themselves declaring bankruptcy. So, they suggest a short sale to the lender. The lender will usually agree to a short sale once the borrower has reached the point of no return. They cannot pay their mortgage and foreclosure will happen. For mortgage lenders, foreclosure proceedings are long, full of hassle, and costly. They want to avoid the process just as much as the borrowers.

As for how you get a good deal, a short sale involves selling a property for less than the outstanding mortgage due. For example, if a home is valued at $125,000, the outstanding mortgage is $100,000, you could expect to pay around $80,000 or less. Your goal is to pay as little as possible, but you still profit when the short sale price is significantly lower than the home’s appraised or fair market value.

3 – Bargaining Power

As previously stated, you want to pay as little as possible for a short sale property. This is how you make a profit. Many lenders want to unload the property as quickly as possible, even if it means losing money. Their view is “at lest we get some and the property is not our problem anymore.” On the other hand, you will find lenders and real estate agents who try to sell the home at fair market value. If you know the home is a short sale property or in pre foreclosure stages, bargain. You have nothing to lose and you may get a better deal.

4 – The Many Ways You Can Profit

As an investor, the goal is to make money. You invest money into a short sale property and use it to turn a profit. There are many ways do so. The easiest and quickest approach is to buy a short sale property, turn around and sell it. Your next option is to improve the home by making needed repairs or valuable upgrades. This should improve the home’s attractiveness to buyers, increase its value, and your profits. Your third option is to rent the property. Even single-family homes can be rented for a profit. Unless you have experienced in the rental industry or purchased a home for dirt cheap, this option is not recommended as it could take years before you see any money.

5 – The Profit You Do Make

As previously stated, investors have multiple ways in which they can profit from short sale properties. How much you make will depend on a number of factors. These include the home’s fair market value, the amount you paid, whether repairs were made, the resell price, or the rental rate. The good news is the different options give you complete control over home much money you make with short sales, how, and when.

Whether you are looking to buy a cheap first home or profit from the real estate market, you will likely examine both short sales and foreclosures. Which is best? Which deserve most of your focus?

Before comparing the pros and cons of both short sale properties and foreclosure properties, it is important to understand the process. Foreclosure is when a mortgage borrower goes delinquent on their mortgage. They can no longer pay it and have exhausted all other options. The home is typically sold at a foreclosure auction or ownership reverts back to the original lender. As for short sales, they are foreclosure alternatives. Foreclosure is damaging to credit reports and costly for lenders. Instead of foreclosure, the property is sold before. It is sold for less than the outstanding mortgage due.

So, what is better? Foreclosures or short sales? It depends.

With short sales, lenders have the final say. They approve all buy offers. With that said, they rarely suggest a short sale themselves. They hope the borrower will make good on the amount due or sell the home at fair market value. The borrower, when they realize they have no other alternative, approaches the bank about a short sale. They know they must leave the property as soon as it is sold. On the other hand, most foreclosures result in unruly evictions. Some home occupants refuse to leave without force. Essentially, with foreclosures, you may be left with difficult home occupants who won’t leave unless the authorities intervene.

If you are looking for less hassle after the sale, it is best to go with short sales or acquire vacant foreclosures.

With short sales, you pay less than the outstanding mortgage due. This typically means a good value for your money. For example, you could acquire a well-kept single family home for $50,000 if the outstanding mortgage amount is around $60,000. This is a lot of money, but that $50,000 can buy you a $100,000 or more home! On the other hand, foreclosures are often sold for dirt-cheap. The price you pay will depend on the property and the competition at foreclosure auctions. Also, remember that those who allow their homes to go into foreclosure have reached the point where they don’t care anymore. This may result in an unkempt or damaged home.

If you are looking to turn the largest profit, foreclosures are your best option. If you are looking to get the best value for your money, short sales are the way to go.

Foreclosure auctions have many rules and restrictions. These vary by state. In most cases, payment is required within 24 or 48 hours. Most often, professional investors with needed funds on hand attend and win at foreclosure auctions. Most have unlimited financial resources. If you want to buy a new home or are just getting started with real estate investing, you may need to secure financing first. Unless you have spotless credit, most lenders will not finance the possibility of you winning at an auction. They will, however, provide financing for short sale properties.

If you have no financial concerns, both foreclosures and short sales are ideal. If a home loan is needed, speak to lender, but they will most often suggest a short sale acquire.

In short, both short sale and foreclosure properties present good opportunities. Whether you are an investor or a hopeful first-time homeowner, keep your options open. You never know what you will find or how good of a deal you will get until you look.