Short Sale vs Auction

“What are the differences between short sales and auction properties?”

When a homeowner falls behind in their mortgage payment and doesn’t catch up, refinance or sell the property, the home is going to become a foreclosure property.

So which is the best stage of the foreclosure process for an investor to buy the distressed property? Before the foreclosure auction, at the auction, or after the auction?

Pre-Foreclosures and Short-Sales

What is a Short Sale?

If you buy a home directly from the owner, but for an amount less than the mortgage owed, that’s a short-sale.  While it used to be common for creative investors to buy pre-foreclosures without paying off the mortgage (subject to deals, wrap mortgages, lease options, etc.), the lack of equity in the vast majority of today’s distressed homes makes those tactics MUCH less useful.  Instead, focus on getting the bank to take less than what is owed… a Short Sale.

Why a Short Sale?

Short sales are plentiful, and can be financially rewarding.  There is no shortage of underwater houses with desperate sellers.  A seller who can short sale his house STOPS the foreclosure process, protecting his credit and often eliminating any risk of a deficiency judgment.  So buying a short sale helps the seller, in a way that buying later in the process just can’t.  As an investor, you can find short sales at any price point, in any neighborhood, with a simple MLS search.

Making a Short Sale work

The major key is to work with a real estate agent experienced in short sale negotiations.   While most of the banks have streamlined their short sale approval process (especially in the past few months), the process still takes a long time and a great deal of patience. An agent who is actively involved in tracking and following your offer is invaluable.  You need an agent who anticipates the bank’s moves and knows how to successfully negotiate the playing field … especially since the bank is paying the commission.

What is needed?

Before a bank approves a short sale, the asset manager is going to require at least one BPO (Broker Professional Opinion) or CMA (Comparable Market Analysis), which is essentially a light appraisal based on comps in the area.  The bank also needs to see a variety of documents, (sometimes on their own forms) including:

  • A fully executed sales contract (with all signatures and initials)
  • An executed listing agreement (showing the property has been marketed)
  • A hardship letter from the seller (telling their story why a short sale is needed)
  • Seller’s bank statements, tax returns, W-2s, and payroll stubs
  • An Estimated HUD-1 (closing statement showing the net to the bank)

How to submit

Ten years ago, we would deliver short sale packages by FedEx because banks would always claim to lose the package or would accidentally shred the fax.  Now most banks have adopted online software to submit shortsales.  But some banks still prefer faxed documents.  You need to know before you submit.

Its always a good idea to submit your own CMA with the short sale package, to justify the sales price and help set the asset manager’s expectations.

ALWAYS submit an exhaustive list of all the repairs needed on the home, together with pictures and multiple bids for the repair estimates.  The more repairs, the lower the value, and the better the deal you can expect.

Getting the offer accepted

Remember that in most cases, nobody knows if a short sale offer will be accepted or rejected by the bank in advance.  A short sale listing simply means the seller and the listing agent HOPE the bank will take a reasonable short sale offer.  Banks turn down plenty of reasonable offers.  But most of the time, the bank rejects the short sale because:

  • Offer is too low (bank believes foreclosure will net more)
  • Short sale package is incomplete (or the bank “lost” documents)
  • Seller does not qualify (too much income/asset shown)
  • Bank sold the loan (often months ago… even though they were negotiating with you)

Short sales compared to auction properties

Short sales are a LOT less risky than auction properties. With Short sales:

  • You get lots of time for inspections, surveys, appraisals, title insurance and closing.
  • You can lock up the property with a minimum down payment.
  • You have many opportunities to back out of the deal.
  • You get to negotiate the best possible price.

On the other hand,

  • Auctions often sell at a steeper discount than short sales.
  • You don’t need much patience with auction properties.

*BIG SECRET for successful short sale offers

Until a bank has actually accepted a short sale offer, there is no way of knowing whether they will let a house go for a particular price.  And a bank will not accept an offer (or even hint at the bottom line price) until a complete short sale package has been submitted and reviewed.  Until that acceptance, the list price is just to gauge interest from the public.

Want to increase your short sale success dramatically?  Look for “preapproved” short sales, where the bank already accepted an offer and the buyer walked.  Properties marketed this way are much easier and quicker to close.  The bank already knows what the BPO or CMA will show, and has already determined the amount of loss they are willing to write off.  They just need a new buyer…

**HUGE SECRET for auction buyers

I can’t tell you the number of foreclosures we have bought at the auction, only to find out that agents were putting the final touches on a short sale closing.  The bank was telling everybody the short sale was approved and ready to close… but the bank didn’t tell their attorney to cancel the foreclosure sale

The interesting thing was that we bought these houses at the auction for significantly less than the bank would have made through a short sale.  The bank discounted MORE at the foreclosure auction than they would have had to discount the mortgage.  Once, we flipped the house the day we got title… to the short sale buyer…. for a huge profit.

So finally, we started submitting short sale offers on upcoming foreclosure auction properties, about a month ahead of time.  The banks would do the BPO, decide their bottom line number, and then… let it go to auction anyway.  But they would reliably discount the judgment and reduce their strike price at the sale.  And since we already knew the rehab and resale numbers, we could bid confidently at the sale.





VIDEO: How to Estimate Foreclosure Repairs and Bids

Want to learn how to value a foreclosure?

Interested in how investors decide their maximum bid at the foreclosure auction?

This new video from walks you through the steps of

  • The 2-Minute Site Visit
  • Back of Napkin Rehab Costs
  • How to calculate a foreclosure auction Maximum Bid

If you found this video helpful, we would appreciate if you would take the time to give a thumbs up on Youtube and/or share this post through your social links!



The 9 Ways to Finance Your Foreclosure Purchase

Buying a foreclosure property at the auction?

You better have the money lined up ahead of time.Dollar Bill

Cash is king at the foreclosure auction.  In some states you have a day or two to pay for the property, while in others the auctioneer won’t even gavel the property sold until certified funds are tendered.  Generally you have to be prepared to pay your entire bid amount right away.

Most other creative real estate investing strategies focus on how to buy or control a property with low or no money down.  That just doesn’t work with foreclosures — at least not at the auction stage.  You might find a pre-foreclosure or REO strategy that lets you get by without cash…. but not a foreclosure auction.

Here is a summary of the most common ways to pay for a foreclosure property.

1.  Cash

Well, that’s obvious, right?  If you have cash in hand (or in a checking account), you don’t need to look further.  Get a cashiers’ check from your bank.  Pay for your property.

Just make sure your bank account is available as cash.  Your CD or money market account might have penalties for withdrawals.  Your “cash management” brokerage account might take longer to liquidate than you think.  Find out in advance how long it will take to get those accounts turned into cash or certified funds.

Obviously, you need to have some idea how much money to bring to the sale.  Will you be making a 5% down payment… or do you have to pay the entire bid amount?  And you need to know the form of payment accepted– cash, cashier’s check, attorney trust account check, money order, etc.  Very few auctions accept a personal check…

If the auction just requires a deposit, most investors will bring a variety of small cashier’s checks and some cash.  So if you are looking to buy a $100,000 house and the rules require a 5% deposit check, you might bring a $5,000 cashier’s check… and a little cash in case you get caught up in the bidding.

2.  Retirement or Insurance

Most people don’t know their IRA can invest in real estate… as long as you have your account with a custodian that permits you to “self-direct” your investments.  With a SD-IRA, you can buy foreclosures, although the timing of getting your cash to the auction can be tricky.  You need to be prepared in advance.  Usually you will need to make arrangements to wire money from the custodian to an attorney or escrow agent (since giving you the money directly is not allowed).

Permanent life insurance (think whole life here… not term) also has cash value that can be borrowed quickly and inexpensively.  But again, you need to talk to your insurance agent ahead of time to know you will have the cash in time for the auction, and how the repayment of the “policy loan” works.

3.  Bank Loan or Line of Credit

Forget about traditional home loans and mortgage brokers.  Banks won’t lend without collateral, and they are not going to cut a check for a foreclosure property you don’t yet own.  They can’t put a mortgage on the property until redemption and objection periods expire. So these lenders won’t lend money when you are looking to buy at a foreclosure auction.

But with good credit and collateral, you might be able to obtain a personal line of credit or a loan secured by some other valuable collateral (your home, business assets, etc).  Small local banks and credit unions are your best option here.  These are easy-to-access loans, with minimal paperwork.  And you usually incur no costs until you use the money on the line of credit.

Most investors have a substantial line of credit as a security blanket, even if they don’t need the money as a funding source.  Just in case.

4.  Credit Cards

Credit cards?  Really? Do you really want to borrow on credit cards?

Actually, if you have a low, introductory interest rate, a low-cost cash advance option, AND a great investment opportunity, credit cards might just work.  But do the math first.  Make SURE the investment warrants the high cost of borrowing on plastic.  For most investors, this would be the last resort.

But every experienced investor has run across somebody who made their first deal work on credit cards.  At a foreclosure auction, it is unlikely they take credit cards as payment, so you will need to make arrangements to get a cash advance or have checks to cash at a local bank against the credit account.

Credit Cards

5.  Friends and Family

For many people, the LAST place they would ever look for money would be friends or family.  It’s embarrassing to ask, you don’t want to owe any favors, and you just know they are going to try and talk you out of this whole idea.

For others, friends and family seem like an obvious source of funds.  But be careful.  Even if they believe in you enough to lend or partner with you in exchange for a cut of the profits or a nice interest rate, is it worth the risk?  Do you want to be reminded of “Johnny’s Stupid Idea” every Thanksgiving for the next 20 years, if things don’t go exactly as planned?

But definitely ask them. Friends and Family are almost always going to try to shoot you down and  explain why your plan won’t work.  But that’s a good test of how well you can articulate your plan.  If you can convince them … you might be ready to start investing.  On the other hand, they might convince you that you have no business doing it.  Which also might not be so bad either.  If you can’t convince friends and family, maybe you just aren’t ready…

6.  Partnerships

Years ago a realtor told me “partnerships are sinking ships”.  Wisdom to live by.

The problem with partnerships is that very few partnerships start with a clear, mutual understanding of exactly what everybody is expecting out of the partnership.  This can lead to huge problems.  That’s why EVERY partnership should be reduced to writing.  Anticipate the problems before they come up to keep everybody happy.  It’s a lot of work… and a bit of a buzzkill… to think through all the negative things that might happen, but it will never be easier to address these issues than right before you start.

Most foreclosure partnerships involve one partner putting up the money and the other partner doing all the work, with a split of profits at the end.  But every partnership is different.

As you get more experienced, you can put together a syndicate with many partners to increase investment opportunities and share the risk.  But you don’t want to start raising money this way without solid legal advice.

While we use “partnership” as short-hand for people teaming up, realize that a General Partnership has its own legal status, and partners become liable for the debts of the other partners.  So a lawyer would usually recommend the “partners” use a different form such as an LLC, Corporation or Limited Partnership. All have the same basic idea– some people put up money to make a passive return, while others do the work.

7. Investors

Also called “private money lenders” in some circles, investors are simply individuals with money to lend.  Look for the “money to lend” ad in the classifieds or on Craig’s List and you’ve found an investor.

Unlike partners, investors are looking for a specific return, not a cut of the profits.  Some only lend with outside collateral, such as your home.  Others lend based on their opinion of your experience and ability. Expect high interest rates and short term repayment schedules.  Plan on pitching an investor the way you would a commercial loan officer at your bank: explain your plan, articulate your expectations and generally sound like you know what you are doing.

8. Hard Money Lenders

Hard Money Lenders are easy to confuse with Investors.  A Hard Money Lender is generally an individual making short term, high interest loans to people who can’t borrow the money they need from a bank.  The difference is that Hard Money Lenders are generally more interested in the collateral than the borrower or the profitability of the deal.  They will only lend if they think what you are buying at the foreclosure sale is worth a lot more than you are paying for it.

Hard money is expensive, but it can work great with foreclosures you intend to flip.  The loans are approved immediately with no red tape, and the lender doesn’t care that the property needs to be rehabbed.  But hard money generally is repaid in six months to a year, so it limits your exit strategies– you don’t want to buy and hold with hard money.

Hard Money

9. Wholesale Flipping

Most people understand flipping.  You buy, rehab and sell.  But Wholesale Flipping lets you make money without ever actually owning the property.  Just as you can assign a contract for cash in a normal real estate deal, you can assign your purchase rights at the foreclosure sale to another investor who wants to do the rehab and sell the property to the end buyer.

As a wholesaler, you do all the legwork, inspections and bidding… then you get a preset fee for assigning the deal.  You make a lot less than you otherwise would if you handled the entire deal, but you don’t have the same risk and work as the rehabber will.  Good wholesalers have a list of qualified buyers lined up before they bid on the foreclosure auction…. or they end up walking from the deposit.


So now you know how to raise money to buy at the foreclosure auction… which method are you going to use… and are you ready to start?