Among the many different strategies available for real estate investors is buying a short sale home. What makes a short sale a short sale and is this something you should consider? Here are 5 things every investor should know before making this decision.
#1. The Reason Behind the Name
Buying a short sale home means purchasing a property at a price below its mortgage due to it accumulating more debt than it’s market value. It’s called a short sale because the selling price of this property fell short of its value.
While the circumstances surrounding a short sale aren’t so great for the property seller, it’s the reason these properties can be so attractive to buyers. However, buying a short sale property can get complicated as there are three parties involved which is the next thing you need to know about.
Related: The 12 Steps of a Successful Short Sale Process
#2. Buyer, Seller, and Lender
Before buying a short sale home, you should understand the transaction flow of this purchase. Yes, you are buying this home from a financially distressed seller, but this money isn’t going to the seller- it’s going to the lender. The lender, in this case, is the bank that the seller took the mortgage out from.
So the seller gets nothing; all proceeds from buying a short sale house go to the lender. The lender can then determine how they wish to treat the difference. Remember, the lender isn’t being given the full value of this property. So they can either forgive what’s short, or the lender will get a deficiency judgment against the borrower (seller). This would require the borrower to pay either all or part of the difference between the property’s actual market value and its short sale price.
Why would a short sale even take place? We see how buyers benefit from a short sale, but where’s the win for the seller and the lender? The benefits of a short sale from the seller’s perspective is that, yes they lost their home, but they’re now partially free of the debt which was with it. As for the lender, this is the last resort before a foreclosure, which is definitely something no bank wants. Since the recession, the US Treasury has released incentives which also motivate lenders to take on the short sale process rather than foreclose properties.
Related: Short Sale vs Foreclosure: What’s the Difference?
#3. Short Sale Process Timeline
Let’s break down the process of actually buying a short sale home. Before real estate investors can even initialize the process, they need to make sure of one key thing. The mortgage lender needs to first give a short sale approval and sign off on it. Buyers need to send in an offer for a short sale and wait for the lender/s to approve it. It could take up to a couple of months before you hear back from them.
After the approval, there will still be some additional time reserved for approving paperwork and liens. Now, after you’ve confirmed that this property is actually approved for a short sale by all lenders involved, be prepared for a lengthy closing process.
If this is your first time buying a short sale home, don’t expect it to be like your previous real estate transactions. It isn’t the type of deal that can be closed and done in a month. Sometimes, the whole timeline of buying a short sale home can take up to a year. If you’re in no hurry, waiting for the process to play itself out can definitely be worth the money you’ll be saving with this short sale real estate property. Buyers need to be willing to wait if they want this deal.
For more on how to buy a short sale, read A Guide to Selling and Buying Investment Property with the Short Sale Process.
#4. The Price of Short Sale Properties
While there are many pros and cons of a short sale, investors and homebuyers go through the lengthy process because they know they’re getting a property for a great price. When both the seller and the lender are motivated to get this property off their hands, this gives leeway for buyers to low-ball their offer and have it be accepted.
The process of buying a short sale home can scare off many investors, so those who are actually up for this opportunity end up with very minimal competition. So you end up with a price lower than what this property’s real estate comps in the location are going for. So financing a short sale investment property should be quite possible for any investor who’s just willing to withstand the time.
Now keep in mind, you don’t want to put in an offer that’s too low. Banks aren’t in the business of losing money. If they think they can make more by putting the property in foreclosure, they’ll pull the plug on the short sale. Typically, the seller first needs to accept the buyer’s price offer, and then it moves on for lender approval. Expect the lender to push for you to pay most or all of the closing fees, so take that into consideration as well.
Related: Buying Investment Property: 4 Best Tips to Get an Offer Accepted
#5. As-Is Sale
Buying a short sale home means investing in a property that’s been in debt for a while now. There could be some extra expenses involved with this investment property as a result of homeowner neglect, or it could be in perfect condition. You won’t know unless you get a home inspection which is absolutely necessary when investing in these types of properties. The buyer can pay for this inspection or do it themselves by using this inspection checklist. Either way, we do not recommend buying a short sale home without first inspecting it.
Related: Rental Renovations with the Highest ROI
Now that you know a thing or two about short sales, you may be ready to start your search. But we have one more thing you need to know before getting started:
The Smart Way of Buying a Short Sale Home
You won’t know how good of a deal you’ll get by buying a short sale home unless you start searching for them. So, where can you find short sales in the US real estate market? You can start looking right now. With the Mashvisor Property Marketplace, it’s easy for investors to find properties listed as short sales, foreclosures, bank owned, and newly foreclosed properties. The best thing is that you can get an investment analysis on these properties as well.
To learn more about how to find short sale homes in the Mashvisor Property Marketplace, click here.