Buy Unsold, Discounted Inventory from Builders in Distressed Markets Part 3

Previously, we have talked about outright purchase at a reduced price, lease option, and lease purchase. Today, you will read about the fourth strategy: short sale.
Short Sale
Another possibility when buying from a motivated builder is the short sale. In this case, the builder is usually behind on payments and in the foreclosure process. One effect of the sudden swing in many of the hot markets is that foreclosure rates have climbed. In fact, just from the second quarter to the third quarter of 2006, foreclosures in your area, check local newspapers that post legal notices or check http://www.realtytrac.com/.
Smaller-scale builders who either built homes on spec (no prearranged end buyer) or who had their building contract canceled are most likely to be in such a position because they have limited funds. In this case, the builder completed the property but has been unable to sell due to the dramatic change in the local market. The drop in property values might have eaten up all of the potential profit and the builder now is unable to sell. He might owe more than the home is worth. He either fell behind on the payments right away, or after some time his funds dried up. Either way, the lender started the foreclosure process. A savvy investor can step in and negotiate with the lender for a reduced purchase price to buy the property.
The investor documents to the lender the new current market value. For example, let’s say the builder built a single-family home to sell for $350,000. Due to the sudden change in the market the value of the home has dropped 15 percent, down to $297,500. Every lender has different rules and strategies to follow when negotiating short sales. For the sake of simplicity, we’ll say that in this case there was only a primary loan. To sell the property quickly and not have to complete the expensive foreclosure process and be forced to resell later, the lender is usually willing to take a reduced price on the property. This is typically in the range of 80 to 85 percent of market value. Keep in mind, however, that a lot of things have changed in the foreclosure market. Today, we do not see lenders taking the discounts that they once did.
There is no question, foreclosure investing is a detailed and complicated strategy. It takes a lot of time and experience to become an expert. In the county we live in, the average homeowner in foreclosure receives 120 letters from investors. Today, there is a fierce level of competition for these leads. That means it takes time and money just to get the leads. Foreclosure is the most time-intensive investing strategy. If you do have lots of time to spend, by all means develop this skill, as it has the potential to be very profitable. If not, other strategies will be more desirable to you.
Always keep timing in mind when buying from a builder in a down market. Buying while values are going down can be risky because it isn’t easy to predict how far down they will go. The optimum time to buy is when the market has hit rock bottom and is poised to start climbing back up. In many of the hot markets in 2004 and 2005, rock bottom might come quickly and the upturn could happen quickly or slowly. Most of these areas still have indicators for strong housing markets, such as solid employment with new jobs created, low interest rates, new people moving to the area, and businesses coming to the area. A huge inventory of new construction, in part, caused the oversupply and resulting market change. As this inventory is reduced and with fever homes being built due to the market downturn, the result might be a swift change where the available supply doesn’t meet the demand. Watching the market inventory can be a good way for investors or home buyers to time their purchases and maximize potential profits. To learn more about timing during market cycles and optimizing the time buyer.


Excerpt taken from Making Hard Cash in a Soft Real Estate Market Chapter 11, Pages 118-120.