Are you an investor looking for big profits in short sales? I am asked daily about whether it’s a good idea to be investing in short sales. An internet search for the phrase “investing in short sales” brings up thousands of hits, many selling courses to assist the investor in learning how to take advantage of distressed property sales. These properties are sometimes viewed as easy money because the seller is in distress. But this is not necessarily the case. Short sale home buying is a sub-specialty of the market that takes guidance and experience if it is to be negotiated successfully.
The concept behind a short sale is this: a homeowner is unable to continue making mortgage payments; however, the outstanding mortgage on the property is higher than the market value of the house. The homeowner (through their agent) negotiates with the lender on behalf of the buyer to sell the property at or below market value, and the lender absorbs the loss.
This sounds like the perfect opportunity for the savvy home buyer or investor. It’s possible to get very good deals – many investors manage to buy short sales at a discount – but investors should be aware that negotiating a short sale is complex and time consuming.
The biggest challenge with short sales is getting the banks to recognize that the property is not worth what they think it is. When we submit what we believe is a fair offer and go to bat on behalf of the buyer, it’s can be difficult to get them to meet us halfway at times. The seller’s agent must be prepared to show good comparables and understand what the bank is hoping to gain in the transaction.
Time frame can also be a major impediment for investors looking to purchase short sale properties. Short sales can take anywhere from 30 days to six months from contract to closing, and the transaction can fall apart at any time. Sellers who are unmotivated to leave the property, and inexperienced agents, along with a lack of a good working relationship with the lender(s) of record all contribute to a lack of a quick successful close.
The poor state of the housing market is a boon to investors looking to purchase short sales, since many banks are getting overloaded with properties that homeowners can no longer afford. With a surplus of homes and a lack of buyers, banks may become more receptive to investors’ discounted prices. Currently, banks generally are accepting about 80 percent of “retail” value, based on appraisal.
Even so, banks will only budge so far. The bank gets a broker’s price opinion (BPO) on the property and, though it’s not impossible, it can be very difficult to get them to go lower than that amount.
If I’m working with a buyer that’s looking at a short sale property, I want to make sure that buyer doesn’t have the idea that they’re going to make an offer that’s 50 percent below market value, and think that they’re going to be able to buy the property like that, because they’re probably wasting their time. Many investors go into short sales believing that they’ll be able to get 50 or 60 cents on the dollar from the appraised value, but that simply is not the case. Banks are not giving properties away today.
However, short sales do have one or two advantages over other types of foreclosures. Short sales purchases can be negotiated to be completely free and clear of any liens. When you purchase a foreclosure property on the courthouse steps, if you don’t do your due diligence you could actually purchase a property with liens and that could be of further cost to you. In addition, you are given free reign to inspect the property, and often it will come to you free of tenancy.
Should investors give up on short sales all together? No. There are definitely great opportunities to be had for those with the patience and negotiation skills to pursue them. But investors need to be aware that buying short sale properties requires a lot of time and effort that doesn’t always pay off in the end. Get a certified and trained short sale agent to represent you. Know that the short sale purchase is just one of the tools in the savvy investor’s toolbox.
Investors would be wise to incorporate other investment strategies into their plans, keeping short sales as an option when opportunities present themselves, rather than concentrating most of their time and energy on short sales.