Are Short Sales the Next Big Investment Market?

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In January 2011, an estimated 74,000 homeowners received some form of loan modification. According to Hope Now, a non-profit mortgage relief organization, this number is 27% less than the amount one year ago. And the downward trend continued in February 2012 with 20% less loan modifications than in 2011.

Why the decrease? According to Eli Tene, co-founder of Peak Corporate Network, it’s not at all surprising. He says in a company press release, “We told the Treasury Department three years ago, when loan modification programs were being launched, that they wouldn’t work because people would still owe a substantial amount of debt. Loan modifications are a band-aid that don’t cure the problem; they just postpone the inevitable – foreclosure, unless the property goes to short sale.”

Property Values – Root of the Problem

 Although the government has sponsored several mortgage-altering key programs, the problem still remains that property values have dropped significantly. As a result, even after loan modification a homeowner may still owe much more than the house is currently worth.

In these all too common situations, a short sale may be the only viable option. This is one of the reasons that the government-sponsored Home Affordable Foreclosure Alternatives (HAFA) has been extended another year until December 2013.

Under the program, homeowners involved in a short sale receive $3,000 for relocation assistance, have their total mortgage debt forgiven and require that participating lenders waive all future claims against the homeowners.

According to Tene, “the recently-improved, government-sponsored HAFA program, with changes going into effect on June 1st, indicates that the government has also started to see the value in short sales. While the government will continue to promote loan modifications, the changes to HAFA signal that officials probably know that the true solution to the real estate epidemic we’re experiencing is short sales.”

How does that affect investors? It creates more opportunities for wholesale and flips. Freddie Mac just made the short sale process shorter – 60 days at most. This could become a very viable investment strategy. As always, be sure to know your numbers and the rules before you take the plunge into short sale territory.

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