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Bank and Government Foreclosures and short sales are all the rage in today's real estate investment market. Let's take a look at why these types of transactions are so hot. What do foreclosures and short sales have to offer you as an investor?
Foreclosure occurs when a property owner can no longer pay the loan on a property as it comes due. The lien-holder, typically after a series of letters and notices, will then foreclose on the property. S/he seize the property, advertise it for sale, auction the property, and apply the proceeds first towards the administrative costs of the foreclosure, and then towards the remaining amount due. Any balance due that remains after the proceeds of the sale are applied continue to be the responsibility of the original property owner, whose property was foreclosed upon.
A short sale usually occurs when the owner of the property is facing foreclosure. It is a way to avoid the credit implications and additional costs incurred if the lien-holder were to foreclose on the property. The seller, with the consent of the lien-holder (or in the case of second or additional mortgages, lien-holders) sells the property for less than the amount of the lien against the property. The lien-holder agrees to accept this payment as full satisfaction of the debt owed and to take the appropriate steps to release the lien from the property. This is beneficial to the property owner because s/he will not have a foreclosure on his or her credit record and also beneficial to the lien-holder because less administrative costs come out of the purchase price at closing, providing them more money than a foreclosure would provide.
Both foreclosures and short sales offer investors a wonderful opportunity to buy quality properties at discounted prices. In addition to providing a great environment for highly profitable sales, it also makes obtaining financing less challenging. If you are purchasing a property for 75% of its value at a foreclosure sale, you will only need financing for 75 percent of its value, rather than 100 percent. This results in 25 percent equity in the property from the first day. Lenders have less inherent risk in making a loan on property that already has equity. They know that if you default on the loan, it will be easy for them to sell the property for 75 percent of its value.
Investors across the nation have been taking advantage of foreclosures and short sales. The benefits of purchasing real estate this way are obvious.
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