8 Tips for Buying a Short Sale
Not all real estate sales are the same. While most investment property purchases have more in common than they don’t, some situations, like short sales, can deviate from the norms quite dramatically. As seasoned investors know, short sales offer great potential for big gains, but only when accompanied by substantial experience and due diligence.
Due to the nature of short sales – sales in which the proceeds from a property sale are insufficient to cover the total debts owed – a little more time and effort is required. Simply making an offer and expecting an expedited process for a fast fix and flip isn’t realistic.
While a short sale can be a big benefit for investors in search of a deal, the process can be long, complex, and stressful. In some cases, it’s even possible to lose out, wasting money instead of making it. However, with the right strategy, there are plenty of gains to be had. These eight tips can help you ensure that your time spent for an investment in a short sale is as successful as possible.
Find Listings: Online or Courthouse Filings
Finding a short sale option isn’t as easy as browsing through the classified section. Unlike the millions of other listings out there, short sales aren’t advertised in the same ways, making it harder to find compelling properties.
A short sale occurs when a lender agrees to accept less than the amount owed on the loan. As such, a short sale is not classified in the same way as a standard sale.
In order to streamline your search and minimize the time investment that goes into sifting through inappropriate properties, utilize online short sale filters on websites like Zillow and Realtor.com. Alternately, you can use courthouse filings to learn more about homeowners facing potential legal action for an inability to meet debt obligations. This strategy can also give you a leg up on potential competitors; courthouse records can offer you a sneak peek into what’s soon to hit the market.
Be Prepared for the Approval Process
Investors who are accustomed to the traditional approval process may find the differences in investing in a short sale property a little jarring, but preparation is key. Rather than making an offer and expecting things to move quickly, it’s best to learn more about the differences in a short sale approval process.
Buying a short sale requires significant time and patience. In a traditional sale, the seller’s word is the only one that matters. If the seller is prepared to accept your offer and enter into negotiations, that’s all you need to proceed. In a short sale, however, the seller’s word counts, but it’s not the only barrier to a successful purchase.
In addition to the seller, you’ll also need to get approval from the lenders holding liens on the property’s debt. If multiple lenders are involved, they will likely need to discuss the offer and come to a consensus with each party individually deciding how much of a loss they are willing to take. If you’re lucky, this process can be as quick as a few weeks, but more realistically, it’s more likely to take three to four months. If the price is well below market when making an offer, be sure to let the seller know that you’re willing to wait it out, no matter how long it takes.
Don’t Expect to Negotiate Contingencies
Negotiation is a major component of a standard real estate transaction. Most experienced investors are used to negotiating quite aggressively, either by aggressive pricing or requesting significant contingencies ranging from a new heater to an updated roof. Some of these requests work and others don’t, but investors seasoned in traditional sales are used to demanding as much as possible.
Negotiating in a short sale is rare and there is generally little room to play hard ball. With all the moving pieces and parts in a short sale, coming to an agreement at all can be a delicate balance, and an effort to change the terms of a sale is likely not going to be received well.
In a short sale, all parties are attempting to minimize their losses. An extra investment in minor – or, worse, major – repairs could be all it takes to tip the scale out of your favor.
Estimate Repairs as Accurately as Possibly
Without the ability to negotiate for contingencies, you’ll have to cover the cost of any changes you plan to make to the home, whether aesthetic or functional. These changes can range from serious, like a whole new roof, to something superficial, like fixing a plumbing problem.
Investors who are used to sellers reaching an agreement on contingencies are going to have to take a new approach when making an offer and closing a sale. Instead of assuming minor costs can be covered by the seller, you’ll have to take these on yourself, whether you’re fixing and flipping or preparing for the rental market.
Repairs can add up quickly, especially when there are a few big tasks on your plate. When working with your inspector, be sure to pay close attention to any issues highlighted so that you’ll have an accurate budget in mind. Consider consulting with contractors or other trusted professionals if necessary.
Have a Reliable Real Estate Agent by Your Side
Real estate agents aren’t made equal. Some are good, some are fine, and some aren’t worth your time at all. When choosing an agent for the short sale process, an educated resource can make a world of difference.
You may have a few favored real estate agents you prefer to work with, but your go-to team may not be good enough when you’re considering purchasing a short sale property. In a short sale, you want a specialist, not a generalist. Agents who specialize in short sales know the ins and outs, can add some insight into the property’s potential, and can guide you through the offer and negotiation process, in the event that there is room to negotiate. Your agent will be an asset, so choose wisely.
Prioritize Due Diligence
A great agent is a significant resource, but even someone who knows short sales inside and out doesn’t replace the need for independent study and due diligence. Even the best agents in the world don’t know everything, and at the end of the day, you need to take control of your own portfolio.
In every property transaction, research is of the utmost importance. Things like market strength and average home value don’t go away with a short sale; they’re just different. Instead of assuming your real estate agent knows all or that you’ve only received truthful information from the seller and lenders involved in the short sale, it’s up to you to do the legwork to determine whether the deal you’re getting is a good one.
Don’t Ignore Legal and Insurance Information
A short sale can be a complicated process, differing from virtually all other forms of sales. The legal considerations are different, the offer process is different, and even the insurance requirements may be different.
If you’re relatively inexperienced in short sales, it may be worth it to forget everything you currently know and take a new approach to the protections available in a property transaction. Short sales are very different than a normal sale, and the legal procedures are often different as well.
In order to make sure your sale is on the right track, consider hiring a lawyer experienced in short sales. The right attorney can be an asset during closing, and an attorney experienced in short sales makes it significantly easier to ensure everything is by the book.
Have Your Finances in Order
Financial stability and organization is a huge part of succeeding in a short sale. Due to the nature of a short sale, fiscal missteps can stop the transaction cold, virtually destroying the likelihood of adding to your portfolio.
Before proceeding with putting an offer on a short sale property, be sure you’re organized and prepared for what’s to come. Every short sale offer package should be complete. In addition, understand that you should have a mortgage pre-approval in hand prior to making an offer; in short sales, a standard pre-qualification letter may not be enough to convince lenders that you’re serious.
Some property investments can be made with a limited down payment, especially those you plan to hold for a significant period of time, but short sales aren’t one of them. When you make an offer on a short sale property, a sizable deposit can be the difference between a yes and a no.
After presenting an offer, don’t sit idly by and hope someone calls you back. After all, this is your time and money on the line, and even if you ultimately decide not to go through with the purchase, you’re utilizing resources that could be going to another potential investment. Be sure to get a name and number from someone in loss mitigation at the lending houses you’re working with and follow up at reasonable intervals, no more than once a week.
Buying a short sale property comes with a lot of advantages, but seasoned investors know that with all potential rewards comes some risk. Without a proper approach to the investment process, it’s easy to allow a great opportunity to pass by. With these tips, you can be sure you’re prepared to buy the perfect short sale property.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574 LOAN or by visiting westparkloans.com.