An Introduction to Investing in Short Sale Properties
Real estate investment has been a recent financial disaster for many people. No argument there. The leveraged investing formula that seemed so strategic and clever turned out to be way more risky than most home buyers, bankers and politicians realized. And there's still a lot that's scary out there in the economy: high unemployment, regular talk of another recession, the unsustainable finances and debts of the weak European economies.
But the disastrous meltdown has produced two spectacular benefits for rental property investors who haven't been wiped out:
Big Benefit #1: Giant Discounts
Here's the first giant benefit: The absurd process for a buying a short sale property--buying a property at a price less than the seller's mortgage--creates a huge discount. Recent industry studies suggest, in fact, that the average short sale discount exceeds 20%. A home that should sell for $200,000 in a traditional transaction, for example, on average sells for $160,000 or less as a short sale. That's huge.
Note: Short sale statistics, or at least good ones, are still pretty difficult to obtain. But one good source to check out is RealtyTrac. The RealtyTrac August 23, 2011 press release, "Short Sales Soar in Second Quarter," for example, provides short sale discount information for a variety of localities. This press release was available at the time of writing at the www.realtytrac.com website.
Big Benefit #2: Strengthening Rental Market
The second benefit for investors? Nearly every homeowner who loses a house in a foreclosure or short sale becomes a renter. The crash in homeownership, then, creates a boom in rental property. Some industry experts suggest that each 1% decline in the home ownership rate reflects one million homeowners becoming renters. With the current homeowner rate at 66% and experts expecting that rate to continue to drop until it reaches 60%, vacancy rates are dropping and rents are rising in many areas.
Note: For one reliable and easy-to-obtain source that provides examples of these sorts of comments, check out the Wall Street Journal article, "Apartment Values on Rise, and Rents Up with Them," on page C11 of the Wednesday, October 26, 2011 issue.
What the Benefits Mean
As a result of the striking benefits available, short sale investing is an option active real estate investors should consider.
On the pages of this website, I'm going to talk about short sale investing, including an extended discussion of the reasons for the discount (it's not all peaches and cream) and about how one can and should analyze a short sale investment using capitalization rate analysis. I'm going to provide a brief laundry list of tips for people who want to invest through short sale properties. I've also provided a free Microsoft Excel workbook you can use to analyze short sale investment properties.
Note: In the $.99 Amazon Kindle e-book version of this website, I discuss and provide step-by-step instructions for using the Microsoft Excel workbook to estimate precise rates of return that recognize both the effect of appreciation and leverage. The Amazon Kindle e-book version of this website also provides a short appendix that gives an overview of how tax accounting for real estate investment works so you can also understand the tax benefits of short sale investing. If you're interested in a longer, more thorough discussion of real estate taxation, check out the Real Estate Tax Loopholes e-book, available for download from this website.
Before I get into those bigger topics, however, I want to spend just a few paragraphs talking about the ethics of short sale investing. Just to be very direct, are you or am I hurting people or our communities by investing in the homes people lose through short sale transactions? And a similar question, are you or am I further damaging the economy--an economy that's already taken a beating because other people (buyers, brokers and bankers) basically didn't give a hoot about the larger effect of their actions--just to make a buck?
Next Section: Short Sale Ethics
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:
Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...Read More
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
Using an S corp for your real estate investing? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.Read More