We may not have heard the name as often this last year as before, but short sales are still a thing. As an investor, you may come across more short sales than regular sales, and sometimes it’s a good thing.
Real estate investors like short sales because they can usually buy the property for a fraction of its value. But that’s not always the case as no two short sales are the same.
Before you jump into a short sale, you should understand the pros and cons of buying a short sale home to see if it’s right for you.
What Is A Short Sale?
Before we jump into the pros and cons of a short sale, let’s look at what it is. It occurs when a homeowner owes more on the mortgage than the home’s value. If the homeowner wants to sell, he/she can ask the mortgage company for a ‘short sale’ or to sell the home for less than they owe.
The bank will lose money on the deal, but to them, it’s often better than going through the foreclosure process. For real estate investors, it opens up the possibility of acquiring a property for less than the true market value. This ultimately translates to greater profit when the house is eventually sold.
The Benefits Of Buying A Short Sale
- You’ll likely get a good deal. Most short sales occur because the homeowner can’t afford the mortgage any longer. Both the seller and the bank are usually motivated to sell and may take any offer on the home to get it moving.
- There is usually less competition. Short sales take quite a while because the bank is involved. Sometimes buyers wait 4 – 6 months for the process to complete. Most buyers won’t wait that long so there is less competition for these properties.
- The home is usually in good condition. When you buy a foreclosure, there’s a good chance the home will be destroyed, especially if it was vacant. Short sales, however, usually have the sellers still in the home maintaining it.
The Disadvantages Of A Short Sale
- The process takes a long time. Like we said above, these sales aren’t ideal for a buyer in a hurry. Because you’re dealing with the mortgage lender and not the seller himself, there is a lot of lag time between communications that would normally take place instantly when buying a standard home.
- The home may not be in perfect condition. The sellers aren’t going to fix anything that’s wrong with the home, so what you see is what you get. In most cases, the house is sold as is. If you aren’t getting a fantastic deal on the sales price, you could end up spending more than you wanted on the home.
- It may not be as good of a deal as you think. Just because it has the words ‘short sale’ on it doesn’t make it a good deal. You still need to do your research and make sure you’re saving as much money as you think and that you aren’t falling for a ‘deal’ that really just ties up your money for a few months.
Is A Short Sale Bad For The Buyer?
Like any purchase, a short sale can be good or bad. It depends on the circumstances. If you come across a home that’s moderately priced and in complete disrepair, it could be bad only because you’ll tie up your money in a house you may not close on for months.
You have no guarantee that the lender will follow through with the sale and by the time you find out, you’ve wasted a few months and possibly lost several opportunities to buy other homes.
But, there are times when investing in a short sale is a great decision. When you come across a great property that the owners just couldn’t keep up with, you may make out on the deal. You’ll buy the property for a low price and be able to either rent it out or fix it up and flip it.
There’s no guarantee what you’ll be getting though, so do your research and use your real estate team to help you determine if it’s worth it. You need to have a very good understanding of house prices in the local real estate market before you put down any money. Using comps (comparable properties) is usually the best way to assess the real estate market in advance. You can also speak to an experienced real estate agent if you need even more detailed pricing for a particular suburb or street.
What Should You Know Before Buying A Short Sale?
Before you buy a short sale property, get your real estate team and do some research. First, know the values in the area. This is the only way to tell if you’re actually getting a decent deal. The word short sale doesn’t mean it’s a good deal – you have to check out the area’s values first and make sure it’s as good of a deal as you thought.
It also helps to know the mortgage amount on the home. This is what the lender uses to decide if they should accept or decline an offer. If your offer is only a fraction of the mortgage amount, they won’t accept it.
Finally, the listing agent should receive a full short sale package from the seller. If the seller is serious and the agent is good, they’ll have everything ready to go so when a buyer places a bid, they can move forward with the lender getting the process moving faster.
Bottom Line
There’s no guarantee a short sale will go through. Working with a real estate team and having your financing ready will help speed things along. A trusted real estate agent with experience in short sales should be able to tell if you if the home is a good deal or not, which is important before you invest.
Don’t assume all short sales are a good deal though – they aren’t always. Just like you do your due diligence when you buy a full-priced home, do the same thing with a short sale so you know what you’re getting into and if it’s a good deal.