What you need to know before Investing in Short Sales and Pre-Foreclosures

1. Know the laws in your state
Many states have different laws pertaining to investing in short sales. For example Colorado has the Colorado Foreclosure Protection Act. If the house is owner occupied the Colorado Foreclosure Protection Act Applies. In Colorado we also cannot re-sell the property for 14 days if the Colorado Foreclosure Protection Act applies unless full disclosure is given to the seller, buyer, buyer’s lender, and the short sale bank. And you can’t just hide the disclosure somewhere; you should get an acknowledgement from the bank. You need to research the laws, go to meetings in your area or seek an attorney so you don’t do something illegal and risk going to prison.

2. Know bank rules
Each bank, each investor, and each loan type may have their own rules. For Example some banks won’t allow you to resell the property for 30-90 days after you purchase the property. Banks are getting smart and don’t want investors to try to flip or double close the transaction to an end buyer for a profit on the same day. So they have started to make forms that investor, realtors and the homeowners need to sign and notarize. Many banks have addendum’s to the contract that state you can’t allow the homeowner to remain living in the property as a tenant or have any agreement to re-sell the property back to the current owner. The transaction must be an arm’s length transaction. The bank won’t allow anybody to be related in the transaction or to sell the house to a friend or family member for the benefit of the current homeowner to stay in the house.

3. Know the foreclosure process in your state
The foreclosure process is different for every state. You will need to research this and become an expert. Here is an example of the Colorado Foreclosure process. We use a Public Trustee for our auctions. All foreclosure’s go through the Public Trustee. Once the homeowner is in foreclosure a Notice of Election and demand is filed. The bank can’t foreclose for 110-125 after the NED has been filed. (if the house is vacant the bank can accelerate the foreclosure process). The foreclosure sale can be postponed for 1 year from the original scheduled foreclosure date. If a foreclosure gets postponed past the 1 year mark, public trustee will withdraw the foreclosure. If this happens the bank will have to start the foreclosure process all over again, giving the homeowner another 110-125 days. Bid figures which is the amount the bank will start the auction for need to be posted 2 days prior to the auction by noon. If public trustee hasn’t received them, an automatic postponement for 1 week will be made.

4. Find out what your exit strategy will be
If you want to wholesale a short sale, you may come across some issues especially if you are in state that has a law against this for a specified period. In Colorado if the Foreclosure protection act applies then we can’t wholesale for 14 days. So we always recommend investors do a fix and flip or a fix and hold strategy for short sales.
5. Know what type of loan the homeowner has
You should familiarize yourself with the different loan types and the benefits and rules for each. This will help you with your negotiations with the bank and help you sell the short sale to the homeowner. For example with a VA loan the bank will not accept an offer less than 88.13% of the appraised value because that is the amount VA guarantees the servicer. So if a house appraised at $100K the servicer won’t take a net offer of less than $88,130. If you know these rules per the loan type you will know that there is no negotiating the amount lower which will save yourself or your negotiator time.

6. Renter laws to be aware of
There is a Federal Protecting Tenants at Foreclosure Act. If a lease was signed with a tenant prior to the home going into foreclosure the tenant has the right to stay in the house even after foreclosure as long as they are abiding by the least. Meaning if the house forecloses the bank cannot evict the tenant out of the property they must lease the house to the tenant. So if you are trying to buy a short sale and there is a tenant in the property, they will have rights so you will have to buy the house subject to the lease in place.

7. Is your state a deficiency state or not?
Each state is different whether they can pursue the homeowner for a deficiency judgment or not. Colorado is a deficiency judgment so our negotiators have to work harder to get the bank to settle the account in full.

These are just a few things you need to know.