Recent bank failures and takeover of Fannie Mae and Freddie Mac put more pressure on banks and other lenders to stay liquid at any cost (look at the interest rates offered for money market deposits now!). This means they have to get rid of nonperforming mortgage loans as quickly as possible.
Falling home prices during the last couple of years wiped out the equity in many homes. This situation forces banks and other lenders to make sacrifices as homeowners cannot afford to do so.
The laws passed in the last couple of years made bankruptcy much more difficult. So, stopping foreclosure by declaring bankruptcy is not as easy option as it was in the past.

These three recent developments mean more profit potential for a real estate investor and a bargain for a new home buyer in short sale foreclosure. How can you take advantage of this great opportunity?

Find homes with little or no equity to prepare your short sale offer

Equity was wiped out as a result of additional borrowing by desperate homeowner and falling home price. No buyer will be interested in making an offer for the property unless it is a pre-foreclosure short sale.

Wait for the right moment for short sale

Contact the homeowner after the notice of default (NOD) if you are in deed of trust state or lis pendens if you are in a mortgage state.

Get permission from homeowner facing foreclosure

You need homeowner’s permission (Authorization to Release Information) to contact the bank/lender (you cannot bypass the homeowner as some authors suggest). Get a hardship letter as well to speed up the process.

Negotiate with the bank for highest but reasonable amount of sacrifice

The homeowner will not get any money in short sale. Negotiate with the bank/lender to see how much sacrifice they are ready to make. Expect small sacrifice in the beginning.

What is highest but reasonable amount? It is the highest figure not exceeding the negative (or zero) equity plus total foreclosure expenses that the bank will have to incur if it sells at foreclosure. The bank knows how much it will be left when the property is sold at foreclosure sale. If it saves more by selling it to you after agreeing to short sale, then you may have a deal!

Get a preapproval letter to strengthen your hand in short sale

Get preapproved and present your offer with a preapproval letter (valid for 60 days). Remember: the bank is already in trouble and does not want to find out that you cannot afford to buy the property two weeks (typical financial contingency period) later.

Getting a preapproval or prequalification letter from doesn't cost you a penny!

Important considerations in preforeclosure short sales

You are buying the property from the homeowner, not from the bank/lender. Check if the homeowner has any other loan or debt on the property, overdue tax, or any other obligation. Negotiate with other creditors, if any, to payoff.
Never make an offer without a deadline. However, give more time to the bank/lender considering their decision-making process as compared to an individual seller.
Never forget to get the deed to control the property.

Win-win for everyone: Short sale is faster; everybody saves money

Pre foreclosure short sale works well as the homeowner avoids foreclosure; bank gets rid of a nonperforming loan, loses some money but stays liquid; and finally, you make a nice profit as a reward of creating a win-win for all parties.

Recent financial and economic developments created new opportunities to make more profits in pre-foreclosure short sales. Prepare your action plan and get ready to negotiate win-win deals.

About the Author: John Anderson worked as real estate agent, Realtor® in Florida and Virginia and certified home inspector in California. He publishes foreclosure newsletters on bank and government owned foreclosures.

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