Thinking about adding a new investment property to your portfolio? Making an offer on a short sale is one of the best ways of getting good real estate deals.
If a property is being sold for less than what the owner owes in an outstanding mortgage, the sale is considered a short sale. Homeowners are forced to make a short sale due to reasons such as excessive borrowing, job losses, and declining home values.
However, a short sale should be distinguished from a foreclosure. A foreclosure happens when the seller’s lender repossesses the property and sells it themselves. Quite often, homeowners attempt to make a short sale in order to avoid foreclosure.
While buying short sales is a great opportunity for real estate investors to purchase property for under list price, making an offer on a short sale house is not easy. There are numerous potential pitfalls that buyers need to be aware of while learning how to make a short sale offer.
To ensure the process goes smoothly, here are 7 helpful tips for making an offer on a short sale:
1. Do Your Homework
Before making an offer on a short sale home, real estate investors should perform their due diligence. Usually, short sale listings are priced below market value to attract potential buyers. However, this is not a guarantee that the bank will accept the low pricing. Therefore, as an investor, you need to carry out a comparative market analysis using real estate comparables (real estate comps). Check similar properties in the area and compare prices. Quite often, banks accept short sales priced between 5-10% below market value.
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You should also talk to the listing agent to find out how many short sale offers have been received, what the seller is seeking to recoup, and whether the price has shot up or dropped. You’ll also want to perform a neighborhood analysis as well to ensure the area is a profitable investment location. Don’t make an offer on a short sale property until you have all this information.
2. Find Out If the Short Sale Is Lender Approved
Before buying a short sale home, find out if the short sale is lender approved. Though many properties are listed as short sales, it does not necessarily mean that the transaction will be done as one. At times, the seller’s lender might decide to go into foreclosure to get a better deal. Therefore, real estate investors should first confirm whether the short sale is lender approved before making a purchase offer.
3. Offer an Earnest Money Deposit
An earnest money deposit shows how serious an investor is about purchasing a property. Though many real estate investors only pay the minimum deposit required, those who are keen on winning the short sale should go further. For instance, a deposit of between 1-3% of the sales price will get the bank’s attention. Once the short sale has been approved, buyers should put their deposit in a trust account.
4. Sort Out Your Finances
Any short sale seller will want to know if the real estate investor has the financial capability to buy the property. Therefore, having solid financing is very important for success in a short sale. To enhance the chances of your offer being accepted, you should either buy the property in cash or have a pre-approval letter from a bank. A pre-approval letter is basically a commitment by the lender to give a mortgage of a specific amount. This letter is more important than the pre-qualification letter since it indicates that your finances have already been vetted and the loan approved.
5. Don’t Ask for Contingencies
In a traditional home sale, investors can negotiate contingencies with the seller to cover fees, minimize closing costs, and make renovations before closing the deal. However, since the lender is already taking a loss from the transaction, they are not likely to approve your contingencies in a short sale, especially if they have multiple offers to consider besides yours. Do not request seller-paid home warranty plans, roof certifications or pest inspections. Even if the need for major repairs and upgrades is obvious, don’t attempt to negotiate them. Resolve to purchase the property in an as-is condition.
6. Be Patient
Even after you have struck a deal with a motivated seller, the seller’s lender(s) must approve the short sale before it is closed. During this process, the lender looks at your offer and considers whether they are willing to take the loss. In addition, the lender vets your finances to find out if you have the capability to buy the short sale property.
When only one lender is involved, the approval process usually takes about two months. However, it could take four months or more with multiple lenders. Many buyers lack patience and decide to walk away before the approval process is complete. To show your good faith, assure the seller that you are ready to wait as long as it takes.
7. Work with Professionals
Hiring the services of real estate professionals will enhance your chances of making a successful offer on a short sale. You need an experienced real estate attorney to handle the short sale negotiations on your behalf and to take care of the paperwork. In addition, consider working with a real estate agent. An agent will show you short sale properties for sale and help negotiate the purchase. Finally, you also need a title officer to carry out a title search on the investment property to see if there are any liens attached. If the property has multiple lien holders, the short sale process can get very complicated.
Making an offer on a short sale comes with a wide range of risks. The short sale offer could be rejected, meaning that weeks or months will have been wasted waiting. On the other hand, the offer could be approved but come with bad terms. Since the investment property is being purchased as-is, investors have to bear the costs of repairs. However, if you do your homework and follow the above 7 tips, a short sale could eventually turn out to be a very profitable real estate investment.
To learn more about how Mashvisor can help you find profitable short sale investment properties, schedule a demo.