Buying a short sale is a great opportunity for real estate investors to acquire income property in the US housing market at a great bargain.
So, What Is a Short Sale?
A short sale happens when a property owner owes more on the outstanding mortgage than the property is worth. The mortgage lender then agrees to have the property sold for ‘short’ of the money owed. Though this means that the lender takes a loss, short sales are usually seen as a better option for everyone involved compared to a foreclosure. A foreclosure happens when a lender takes ownership of a property due to an unpaid mortgage.
Advantages of Buying a Short Sale
Here is how you can benefit from a short sale investment:
- Low pricing – As mentioned earlier, lenders agree to a short sale to cover part of the outstanding mortgage balance. This means that buyers can typically acquire short sale real estate at a price below market value.
- Better financing terms – Lenders are usually keen on selling short sale property fast to avoid incurring more costs and accruing more debts. As a result, they are likely to offer buyers better financing terms – such as low interest rates – in order to make the real estate deal more attractive.
- Free equity – Since short sale homes are usually fixer-uppers sold below market value, buyers can easily add equity to the investment property immediately. With just a few repairs and renovations, you can drastically increase the value of the home.
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Downsides of Buying a Short Sale
Though buying a short sale is a way for buyers to get great real estate deals, it comes with its share of drawbacks:
- Depends on the mortgage lender’s approval – In a traditional real estate property sale, the only person that needs to give approval is the homeowner. For a short sale, however, the lender must also give approval. This makes the process even more complicated.
- Long process – How long does it take to buy a short sale? It varies depending on how long it will take to get approval. It could take anything from a month to one year for a lender or lenders to approve a short sale. Therefore, if you want to buy rental property quickly, short sales might not be the best option for you.
- Property sold ‘as is’ – Can you negotiate the price of a short sale? The answer is no. Buying a short sale means purchasing property ‘as is’. You cannot negotiate the price based on any required repairs and improvements.
- Opportunity cost – Pursuing a short sale deal for months could mean missing out on other great real estate investment opportunities.
How to Buy a Short Sale: 5 Simple Steps
Buying a short sale involves the following steps:
1. Conduct a short sale property search
An investment property search is the first step in how to buy a short sale. But, how to find short sales? There are several places where you can look to find them:
- Public records – You can check for short sale property listings with title companies, national or local list providers, and the county recorder’s office. Though such records usually don’t provide property descriptions or photos, they include details such as the property owner’s home and address, as well as the name of the lender.
Related: Short Sale Listings: Where Investors Can Find Them
- Real estate wholesalers – You can get access to short sale listings through wholesalers in your area.
- Real estate agents – Since agents work with sellers, buyers, and lenders, they are usually the first to know when a home is about to go into foreclosure.
- Mashvisor Property Marketplace – This is a great place to find both listed and off market properties all over the US. It comes with property filters that you can use to narrow down the options to fit your criteria. Analyzing a short sale property in the Marketplace is easy using Mashvisor’s investment property or Airbnb calculator. You can analyze the investment potential of short sales based on metrics such as occupancy rate, cash flow, cap rate, and cash on cash return.
Related: What Is a Good Cash on Cash Return?
2. Do your real estate due diligence
Once you identify a few profitable investment properties that fit your criteria, you need to conduct some research to get more information. Hire a professional home inspector to conduct a thorough inspection of the home before you make an offer. Get a rough estimate of what you are likely to spend to renovate or repair the investment property.
With the help of a real estate agent, conduct a comparative market analysis to find out how much similar short sales in the neighborhood were sold for in recent months. This will give you an idea of what kind of offer to make on the property. Also, look at real estate comps to try and figure out how much equity you’ll gain upon buying depending on your offer.
Your due diligence should also involve checking for liens and encumbrances on a property. You can get this information by conducting a title search.
Related: Due Diligence in Real Estate: 9 Crucial Steps
3. Get your investment property financing in order
When it comes to how to buy a short sale, the ability to move fast is very important. When the transaction is approved, the seller’s lender might want to close in as little as 20 days. Unless you are paying cash, you need to get preapproved for a mortgage as early as possible. Being in a position to finance a short sale property shows the bank and the seller that you are serious about buying the property. It also gives you an advantage over other potential buyers bidding on the same property.
4. Make an offer on the short sale home
Once your financing is in place, go ahead and make an offer with the help of an agent. To enhance your chances of getting the deal, make sure your price is as close to the listing price as possible. In case the lender comes back with a counteroffer, you should have decided beforehand the maximum price you are willing to pay. If they are not willing to accept your figure, simply walk away.
5. Close the deal
Short sale closings are handled by title companies and other settlement agents. The paperwork involved is almost similar to that used for traditional sales. The seller’s lender will set a closing date on which you will be required to be present to finalize the deal.
Though anyone can learn how to buy a short sale, you should first know what you are getting into. If you walk into it blindly, you could end up losing lots of time and money. Be sure to work with a qualified real estate agent who knows how short sales work. Such an agent will help you navigate the process and enhance the chances of closing a deal.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.