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Income Property Short Sales and HAFA

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In the past I’ve written about so-called shadow inventory, as well as other topics related to investing in foreclosure property.  This time I’d like to focus on short sales.  Foreclosures are clearly exploding, and as such short sales are becoming more and more common.  Another related topic I will touch upon is the Home Affordable Foreclosure Alternative (HAFA).

First and foremost, what is a short sale?  It basically refers to the process of selling a soon-to-be-foreclosed property for less than what it is worth, as long as most or all of the outstanding mortgage balance is covered.  For example, if a rental property that is facing foreclosure is worth $200,000 and has $160,000 left on the mortgage, the bank might be willing to sell it for $150,000 to essentially cut their losses.  A short sale makes sense for the lender because it allows them to avoid the expensive process of foreclosure, and it makes sense for the distressed owner because they can avoid having the foreclosure blemish his/her record. 

HAFA was formed by the US government last year as an alternative to traditional short sales and foreclosures.  HAFA enables homeowners to avoid foreclosure and move on with their lives by allowing them to sign a deed in lieu of foreclosure and enter into a short sale agreement with the lending bank.  The homeowner and lender work together in this scenario: the owner will find a buyer and the lender will then work with both parties to execute a short sale agreement. To stimulate participation, the government incorporates incentives for both the homeowner and the lending bank to engage in this process.

HAFA can be utilized by income property investors to purchase a distressed property via the short sale approach.  By communicating the benefits to the owner ($3,000 in relocation funds, etc.), a savvy investor can create a motivated seller.  And as you know, a motivated seller is usually a prerequisite to an excellent deal.

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