Who doesn’t want a good real estate deal? While short sales can be a great opportunity for real estate investors, they do oftentimes come with a catch.
What Does a Short Sale Mean for the Buyer?
Short answer- it means you’re going to wait a period of time that can go past 6 months to close on a great real estate deal of a discounted property. Let’s answer “What does a short sale mean for the buyer?” by clarifying a couple of things first.
What Are Short Sale Homes?
It’s a home in the pre-foreclosure status. A home is considered a short sale property when its financially distressed homeowner misses mortgage payment after mortgage payment until finally, the debt exceeds the market value of the property itself. The property seller’s lender is then at a point where they are desperate enough to sell the home for a price below the debt due on it. Because the amount you pay as the property buyer comes up short (it is less than what’s owed on the mortgage loan), these homes are referred to as short sale properties.
The Other Parties Involved in the Short Sale Process
If this is your first time buying a short sale home, just know that it isn’t like what you’re used to with other real estate investments. We’ll walk you through the short sale process timeline in a bit. But for now, know that in addition to you and the seller, the mortgage lender and all lien holders must consent to this sale. There will also be a listing agent involved, and if you hire one, your own real estate agent/broker, and maybe even a real estate appraiser.
The Pros and Cons of Buying Short Sale Homes
Is investing in a property like this really worth it? Do the benefits of a short sale make up for the negatives? Take a look at what it means to buy a short sale home:
PRO: A Profitable Real Estate Investment
There’s no doubt about it, short sale listings will definitely be priced at amounts below the market value, making them an attractive prospect for the savvy real estate investor. The lender knows they’re taking a loss by making this short sale go through, but (in certain cases) it’s better than foreclosing on the property.
Just make sure you study the real estate market you’re investing in well. Go over the stats of recently sold properties with similar characteristics (real estate comps) to assess the market value. Buying this discounted property could prove to be one of the most profitable investments you make.
CON: 6 Months for a Short Sale Closing
This isn’t always the case, but as a property buyer, expect to wait up to 6 months before hearing any word back from the mortgage lender on your offer. Sometimes, all parties come to an agreement quite early and the real estate transaction is done in 2 months (although this is rare). Typically, mortgage lenders take a couple of months reviewing the documentation and your purchase offer. Even then, they might not accept the offer. They’ll respond with a price they think is more appropriate. It’s an even longer process if the lender hasn’t considered a short sale yet, and the initial offer is coming from you, the buyer. If you go after a real estate property that has already been approved for a short sale, this process can be much shorter.
PRO: Less Competition
Silver lining: short sales may take longer to close, and since everyone knows that, you won’t face as much competition. Or you’ll cut down on competition from other types of buyers, like homeowners. People typically want to reduce the level of stress that comes with purchasing their first home, so a long closing process won’t be on their list. The same could be applied to real estate investors as well.
In addition to that, short sales are usually off-market properties. That means you won’t really find them publicly advertised for sale on traditional real estate listing sites, further reducing the competition. Having a good agent who knows where to look will help you find great investment properties no one else is even looking at.
Related: How to Find Short Sales: 4 Best Ways
CON: ‘”As Is” Condition
If the property seller couldn’t make their mortgage payments, you can be sure that they weren’t paying much attention to regular repairs and maintenance. While typically the seller covers any repairs before a home is sold, this isn’t the case in a short sale. And one of the main reasons lenders agree to a lower sale price is because they don’t want to pay for any repairs themselves. So keep in mind that this investment property might need major work.
The Short Sale Process for Buyers
A long list of real estate professionals have succeeded in buying short sale homes, but that’s because they followed the right steps. Here’s a quick summary of the short sale process timeline:
1) Find the Potential Short Sales in Your Area
Check courthouse records, online listings, or hire a buyer’s agent who is experienced in this type of real estate transaction. Take a good look at potential investment properties. Try to compare how much is owed on the mortgage with the property’s value. Move past any properties where the homeowner has enough equity in the home as a foreclosure is favorable to lenders in this case.
2) Find All Liens and Mortgages
Do a title search and find out what and how many liens are on the property. Who is the primary lienholder? How many many different lenders are involved? You can ask the seller or the listing agent about this information.
3) Short Sale Financing
Figure out how you’re going to be financing this purchase before you waste time on a search that won’t go anywhere. If you aren’t paying cash, a good credit score might get you a loan from the same mortgage lender.
4) Contact the Lender
If you’re pursuing what you think is a potential short sale home, you first need to get authorization from the seller. Then you can contact the lender to discuss the mortgage situation.
5) Put Together Your Proposal
Here’s where all the important paperwork comes in. There are a lot of documents that a lender will require. This is what to include:
- A hardship letter: This is a letter written by the seller. In it, the property seller will reflect on how bad their situation is. This should show the lender that the seller is truly unable to make the mortgage payments. The seller should include proof of this such as bank statements, tax returns, and delinquent accounts. If the seller didn’t think of a short sale themselves, you will need to convince them to write this letter.
- Appraisal statement: The goal with this is to show the lender how low this property’s market value is. It needs to be low enough for the lender to realize that it won’t make a good enough sale under normal circumstances. Get this value assessment either from an appraiser or a broker.
- Purchase and sales contract: Both you and the seller should sign off on this contract. Based on the appraisal, set a good offer. Yes, you don’t want to pay a lot, but this offer should be good enough for the lender to bite. All lenders need to approve this short sale.
6) Negotiate the Terms Before Closing
Be ready for counteroffers to come from both sides. Short sale negotiation for a lower price on your part can be justified by detailing the extra costs and liabilities this investment property comes with. Expect these negotiations to take a while before all three parties can reach an agreement. But once you do, get everything in writing and finalize the deal.
Learn More: The 12 Steps of a Successful Short Sale Process
Cutting Down the Steps of a Short Sale
What does a short sale mean for the buyer? A lot of steps. But that doesn’t need to be the case. The most difficult part is actually finding a property to qualify for a short sale in your real estate market. If you’re wondering how to find short sales quickly and easily, visit the Mashvisor Property Marketplace. Here, you won’t just find short sales. You can search for all types of off-market properties- foreclosed, newly foreclosed, and bank-owned properties too. Learn more about the Mashvisor Property Marketplace and start investing in short sales now.