Short Sales, Reos Or Motivated Sellers, Which Is More Profitable?

In a market full of mortgages going into default, a lot of real estate investors are never sure which way to go to get the best deals.

Do you get foreclosed REOs from the bank? Should you negotiate short sales to buy the houses for less than the mortgage balance? Or should you buy directly from the motivated sellers?

We will analyze these 3 situations here.

These 3 methods all have their pros and cons; let's analyze each one:

1) Buying foreclosed houses from banks - REOs
Banks have too many foreclosed properties and they increase in number every day. As soon as they acquire them, they then try to sell them quickly.

Buyers are few and these properties can take a long time to sell.

Banks can therefore offer great discounts, especially if they need to be fixed up.

As a real estate investor, shop carefully for good REO deals because not all them will meet your buying criteria or equity margin for you to make a profit.

2) Short Sales
Banks foreclose on homes when home owners are unable to pay. Before they foreclose, they are often willing to take less than the mortgage balance. This is called a short sale.

A bank will order an appraisal to get the true market value of the property. Then they can give you a discount on the mortgage based on their numbers.

A bank that holds a first mortgage is likely to offer very little discount on the mortgage, usually not more than 20% especially if it does not need major repairs.

A bank that holds a second mortgage can lose 100% of their investment in a foreclosure, so they are more willing to negotiate much lower. It is not unusual to get 80-90% discount on a second mortgage.

A property with more than one mortgage is therefore the best candidate for a short sale.

Short sales can also take a long time, usually 3 to 6 months. You must therefore have enough patience and capital to last you through such long waiting periods.

Banks can reject your short sale application even when all numbers look good. You must therefore be ready for rejection.

You must close fast as soon as you get an approval. Banks will not accept creative financing on short sales.

When all is said and done, you can create a lot of equity and profits as long as you select the right deals, have patience to wait for a long time, can take rejection and you can close fast.

3) Motivated sellers
You can employ a wide variety of techniques to buy houses from motivated sellers.

This includes creative financing.

If the mortgage balance allows, you can also negotiate with flexibility directly with the motivated seller. And you can be as flexible as you need when closing, e.g. you can wholesale a deal right from a motivated seller to a wholesale buyer.

This is always the best way to buy investment houses as long as you can target people in need of selling their houses.

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