Commonly asked foreclosure and Columbus Hud Home Questions - part 1

Over the last few months, I have been receiving a lot of questions at the real estate investing Association regarding how investors can purchase various types of Columbus investment property including Columbus foreclosure properties (also known as short sales), Columbus HUD Homes, REO, tax foreclosures and other types of real estate. In this first article, I would like to address some of the most commonly asked questions

1. What is a short sale?
Simply put, a short sale is getting the bank to accept less than what is owed on one of their mortgages as payment in full. In other words, they are agreeing to take a discount on the note. A negotiated short sale results in a discounted purchase price for the real estate investor. Here's a typical scenario: Sellers are 3+ months behind on payments. Seller owes a $100K and they are asking $100K. The property is difficult to sell through a Realtor because there isn't enough money to pay their commissions and other fees. Sellers have bad credit and can't refinance. They also have terrible underlying financing (ARM) ruling out most creative techniques. In this scenario, both the seller and lender are highly motivated to get out of this mess. If the lender agrees to take $75K as payment in full, that's a short sale. The real estate investor just created $25K in equity. Not a bad investment property. Similar concept for a HUD home sale.

2. Why on earth would a bank agree to let one of their properties go for pennies on the dollar?

REASON #1: Defaulted loans tie up cash reserves. Banks make the lion's share of their money when they originate and make loans. In order to make lots of loans they need available cash. When an existing loan goes into default the lenders are required to set aside cash reserves of 3-8x the amount of the principal balance until the loan is cured. This severely hamstrings their ability to make more loans and run their business. This also hammers their credit and significantly increases their cost of funds

REASON #2: Holding costs eat most banks alive. Most banks are not in the business to own single family homes as investment property as a result of getting the properties back at auction. Holding costs such as taxes, insurance, and the likelihood that the property might take several months to sell play a huge role in this decision. In our market, the banks are getting 80-90% of the properties back at auction. They are struggling to move this inventory and that is part of the reason why they will work with investors and take substantial discounts

REASON #3: They may be in an unfavorable lien position. If the lender is in a junior lien position and there is little to no equity in the property, in most cases, they will take anything they can get

In my next article, I will answer more questions regarding finding and owning Columbus investment property and dealing with common issues involving Columbus Foreclosures and Hud Homes.

Dave Zehala is the Executive Director of the Columbus Real Estate Investors Association. Check out more Columbus investment property, property management, wholesaling, tax foreclosure, lease-option, rent to own, Columbus HUD homes, real estate investment, landlord, REO, foreclosed home, real estate listings, and foreclosure info on his websites.