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The current mortgage rate credit crisis is a golden opportunity for real estate investors to turn a quick profit, provided they're looking in the right areas of the country.  Rising foreclosure rates are quickly becoming a problem for banks and communities across the country. 

The President, Congress and the Federal Reserve working to make an amicable rate freeze on Adjustable Rate Mortgages to slow the problem.  Yet, even with this effort a total of 437,498 foreclosures were filed in the first quarter of 2007.   According to Realtytrac.com, this is an increase of 100,000 foreclosure filings compared to the first quarter of 2006.  Imagine what the first quarter of 2008 holds for the real estate investing market!

Savvy business investors interested in pre foreclosure investing can turn these rising foreclosure rates into a golden opportunity.  Investors can buy a record number of distressed properties in short sales deals, and flip them with minimal renovations for a high return.

States with the Highest Rates of Foreclosures

Areas such as Nevada, Colorado and Georgia are ripe with opportunities for pre foreclosure investing.  According to realtytrac.com in 2007, these states reported an average of one foreclosure filing for every 75 households.  That is triple the national average of pre foreclosure properties. 

New real estate investors can find these pre foreclosure opportunities in even greater numbers in California, Florida and Texas.  According to Realtytrac.com, these states have reported the largest totals of foreclosure filings in the country.   California alone reported 80,595 foreclosure filings in the first quarter of 2007.  This is double the number of foreclosures in the state with the second highest numbers of foreclosures, Florida which came in with 45,156 foreclosures in the first quarter. 

Who’s to Blame?

Many real estate investing experts blame the rising foreclosure rates on the practice of subprime lending.  Also known as near prime or second chance lending, this practice involves giving higher rate loans to homeowners with spotty credit, lower incomes and other problems that preclude them from better home mortgage loans.  Naturally, these homeowners will have a harder time keeping up payments on their property mortgages.

This unprecedented number of foreclosures has created a problem for the banks.  Banks do not want to have foreclosed properties on their portfolios.  They simply do not have the time or interest in maintaining these homes until they can be sold.  In addition, banks must reserve enough cash to cover that mortgage should it foreclose entirely in every single one of those some 400,000 pre foreclosure properties in default.  That’s millions, even billions of dollars that the banks can’t use to make their own profits on!

What it Means for Real Estate Investing?

As you can imagine the banks want to sell those properties, those mortgages or to have their homeowners to catch up bad loans.  Investors can easily negotiate great short sales with the banks to pick up these pre foreclosures at a discount.  Never before has pre foreclosure investing held so many opportunities for success.

Pre foreclosure investing is an excellent way to take advantage of these foreclosure filings.  By negotiating with the banks on short sales deals you’ll be able to pick these properties before they are foreclosed on, and you’ll be helping the homeowner avoid bankruptcy. 

Foreclosure rates are skyrocketing, and this is merely the first wave of a credit crisis that's been looming for the past three years.  As other credit products eventually adjust to realistic market conditions, the number of opportunities for short sales on foreclosed properties is going to increase.  Being a savvy investor, that's something you can capitalize on in pre foreclosure investing.

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It's likely that you will come across many properties in preforeclosure that have little to no equity in short sale investing.  In other words, the seller owes as much or more than the property is worth on their mortgage.  In these types of situations, lenders will sometimes sell you the property for less than the full amount of the homeowner’s mortgage in a "short pay" or short sale.

Short sale investing is a great way to build up your portfolio of properties or make a quick profit on resale of cheap properties.  It can be a confusing process to muddle through your first few times.  Once you learn the basics of real estate short sales you’ll find that taking advantage of these preforeclosures is a great way to make money in real estate investing.  All you need are a few short sales tips.

Contacting the Homeowner and the Bank

The process of short sales begins with contacting the defaulted homeowner.  During initial discussions you’ll verify the value of the property, find out how much the homeowner still owes on their mortgage, the name of the bank that is the homeowner’s lender and other information that is necessary to begin negotiations.  

Once you have the foreclosure information from the homeowner you’ll call the bank’s "loss mitigation department" to contact a bank officer with the authority to negotiate a short sale with you.  Most likely, every lender you deal with will have a different name for this department, so expect to have to do some discussing and perhaps be passed around a bit when you first call.  As you make more deals in short sale investing you’ll end up working with the same banks repeatedly, so you’ll already know the person to work with on a deal.

Information Needed for a Short Sale Proposal

When you make contact with the bank officer concerning a short sale.  He or she will let you know the information they’ll need from you in order to consider a deal.  There is a lot of paper work and due diligence involved in making a short sale offer to the bank.  However, you benefit greatly in picking up this discounted property and selling it for a profit at market price.

Specifically, the lender will want to know what the property is worth. The bank will hire a local real estate broker or appraiser to evaluate the property so the bank knows its true market value. If the property is neglected or in an economically depressed area, it’s true market value may be less than the value of the mortgage on that property. 

As a part of your short sales investing packet you will also submit your own appraisal or similar sales information.  Give the lender as much specific negative information about the property as you can.  In addition, include some information about the neighborhood and the local economy to help justify your discounted offer.  Some sources you can use for this type of information would be local newspaper articles discussing these types of subjects.  If the property has damage, or is neglected as is often the case with pre foreclosure properties, you should also get estimates for repair from a contractor.  Deduct the highest estimated costs of those repairs from your offer.

In addition, the lender will ask you about the homeowner's financial status.   The homeowner has to prove that s/he is insolvent and cannot afford payments.  If the homeowner has experienced real financial hardship and has no financial means to repay the loan, the bank is more likely to negotiate a short sale with you. 

This type of documentation may involve even more paperwork than an original mortgage application will. In addition, the borrower should submit a "hardship letter," which basically details just how much financial trouble the borrower is experiencing. Although you should not lie, paint the most negative picture you can while still being completely honest.

Short Sale Investing is Good for the Bank

A preforeclosure sale can be advantageous to the bank, because a short sale saves the lender many of the costs associated with foreclosing.  The investor usually becomes responsible for paying all of the closing costs on the property, as well as paying for the property.  These types of costs can include attorneys' fees, borrower bankruptcy delays, borrower eviction, property damage, other costs associated with getting the property ready for sale, sales fees, and so on.  

In addition, the banks usually have to hold enough money in reserve to cover that mortgage should it foreclose.  As long as the property is in preforeclosure the bank can’t use that money.  This is what makes investing in foreclosures so profitable.

Contracts and Agreements

When the bank accepts your final best offer on a short sale deal the bank officer will most likely want to see all written contracts between you and the seller. This is to show you aren’t giving the homeowner any cash from your deal.  The bank may also have you sign an affidavit attesting that you won’t be giving the homeowner any money for their part in the short sale deal. 

The purchase contract that you will sign with the bank will include a section stating that you’ll pay all costs associated with this transaction, and that the "net cash" to the homeowner is the exact amount of the short sale amount you pay to the bank.  So, the homeowner doesn’t walk away from the sale of their home with any money.

A preliminary HUD-1 settlement statement may also be requested before the short sale closes.  The HUD-1 is a form used to itemize all charges and fees that the homeowner and the bank pay related to the property sale.  Title and escrow companies will rarely provide one in advance of the closing. However, you can prepare your own and write "preliminary" at the top.

You should not be surprised or disappointed if your short sale bid is rejected at first.  If the property isn't in need of substantial repairs or if the homeowner isn’t truly in financial hardship, the bank may reject a largely discounted offer.  In short sale investing it’s important to pay close attention to the numbers, since you're asking the lender to approve a sale price on a property that is much less than its appraised value.

If you think that you can benefit from a short sale in today’s real estate market, you are in luck.  Check out this excellent short sale resource to find out everything that you need to know pertaining to short sales.