Is Short Sale Investing Unethical or Destructive?
Let me start with the easier question to answer: Is investing in a short sale property unethical because you're profiting at someone else's expense?
I think the answer to the preceding question is clearly "no." In a short sale situation, lots of bad stuff happens. Absolutely. But the bad stuff actually predates the short sale and your involvement with the seller and the mortgage holder who've experienced the financial losses. Specifically, you surely had nothing to do with the situation that creates a short sale: a seller with an unaffordable home mortgage. For example, you didn't advise the seller to purchase the home. And you didn't advise the seller to borrow more money than could be easily be repaid.
Not to get all preachy on you, but I think some people are culpable for the short sale situation: brokers who encouraged people to buy homes or investments they clearly couldn't afford, buyers who needed to lie about their finances in order to get a mortgage, and bankers who allowed and even probably encouraged homeowners and investors to over-borrow-often on terms that provided no margin for error. But that's not you.
In a sense, you're a bit like a doctor who helps a sick patient. Yes, if you're a doctor you're benefiting financially because someone has gotten sick or hurt. But you didn't infect the person with the nasty virus. You didn't cause the accident that led to the injury. In fact, if you're a doctor the patient may need your help to get better.
When you buy a short sale property, in fact, you may actually play an important part in helping someone get back on the road to financial health. The former homeowner can move on and get replacement housing that's affordable given their budget. And if the former homeowner is unemployed-perhaps the unemployment was a factor leading to the short sale-the former homeowner may be more successful in their job search because they'll be able to relocate for a job.
Let me also discuss whether you buying short sale properties is economically destructive. In other words, does the fact that you or I (and others like us) buy deeply discounted short sale properties hurt the local or national economy? Again, I think the answer is clearly "no."
With short sale properties, current owners by definition can't afford the mortgage. But they often can't afford the other costs of homeownership either, including maintenance, insurance, home owner dues, and property taxes.
In a worst case scenario (and you can see this happening in some condominium complexes), neighborhoods and towns, the whole community suffers because homeowners "underwater" on the their mortgages can't care for their properties and can't the pay property taxes and homeowners dues that pay for police and firemen, garbage pickup, common area maintenance, and so on.
For a local economy, pre-short-sale properties can't help the community and probably often hurt the area. And when you or I come in and buy a short sale property and begin maintaining the property and paying property taxes and homeowner dues, things get a little better.
And then there's the national economy. And I think what you need to think about here is how the financial and banking systems deal with the delinquent mortgages connected to short sale properties. Every 8% $400,000 mortgage that's delinquent and not being paid means some mortgage holder (probably a pension plan, retiree, or someone saving for retirement) is getting screwed in a sense.
Now obviously, replacing the 8% $400,000 mortgage with a 4% $200,000 mortgage is not a great trade. The people who invested in subprime mortgages to people who couldn't afford their homes just got killed in the great recession. But better for these mortgage holders to get a 4% $200,000 mortgage that pays interest than to hold a piece of paper that says they should get paid 8% on a $400,000 mortgage-but on which no payments are made.
Accordingly, when you or I and others like us invest in a short sale property, things probably get a little better for the banking system and for the pension plans and retirees who invest in mortgages.
In summary, you can and should feel good about investing in short sale properties. None of us wished it would come to this. Most of the people who are currently financially able to invest in short sale properties probably had nothing to do with the events leading up the disaster. But now that we find ourselves here, one reasonable option is for small investors to invest in short sale properties.
And now let's get into the meat of the argument that short sale investing makes sense for some investors...
Next Section: Understanding the Reasons for the Short Sale Discount
Additional Information for Shortsale Investors
If you want additional information about how tax laws work for a short sale investment or for an individual running a business based on short sale investing, you may also be interested in one of my downloadable e-books shown below:
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One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.Read More
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