Put simply, a short sale occurs when the value of a property goes down from when an owner first purchased it, and the current market value has fallen below the amount remaining on the owner’s mortgage. When the owner decides to sell the property, assuming he’s not going to make up the difference with his own funds, he must get permission from his lender, who has some financial exposure, and must approve any sale price, since that price will dictate the amount the bank will ultimately be losing.
Recent history of short sales
As the financial crisis deepened after 2007, and property values decreased precipitously nationwide, while concurrently initially low-rate adjustable rate mortgages adjusted upwards, an increasingly larger number of homeowners began to default on their loans. With this double whammy occurring in the marketplace, more people fell behind enough in their mortgages that many had to place their properties up for sale. Unfortunately, because there was usually a shortfall in what their properties would fetch in the current realty market and what they owed on their mortgages, a large number of properties fell into this short sale category.
Short sale considerations
When finding a potential deal as an investor in a short sale, you need to be aware of the pros and cons associated with this type of transaction. Consider that you can usually pick up a bargain in the short sale process, though not necessarily a steal. Since the seller has no equity in the property any more, they will be amenable to almost any offer. The bigger issue, of course, is what the owner’s bank who holds their mortgage will allow for a sale price. This is directly related to how much of a loss the bank is willing to take. And banks don’t appreciate taking huge losses if they can be avoided.
So the banks set limits on any given property in their portfolio subject to a short sale, as to what price level, and their potential loss, they are willing to allow. Do not make the mistake of thinking you’ll be able to negotiate much with any lender on this point. Just know what amount you need to acquire the house for to make the deal happen in a positive manner for yourself.
Additionally, banks notoriously are slow in their response time, especially in relation to the overall size of their portfolio of short sale homes. So while an average house sale may take 2 to 3 months from accepted offer to closing, a short sale could take at least twice as long – or 4 to 6 months on average. Sometimes longer. So you need to be extremely patient when considering making an offer on any short sale.
Also, consider the fact that short sales may have greater competition than the average house on the market, mainly due to their initial market pricing being somewhat lower than like homes on the market, to help induce a quicker sale. But also because buyers are naturally drawn to the enticement of a “sweet deal” – which as I’ve already mentioned, isn’t necessarily true.
Another key point to take into account when bidding on short sales, is that investors as a whole will be drawn to them, because, as a pool of buyers, investors don’t require a quick closing, and they are more prepared to wait out the length of time necessary in closing on a property. In addition, investors are also more prepared to offer all cash (or remove mortgage contingencies from the deal) in order to entice the seller and their lender to accept their offer. With more investors making these all cash offers, your advantage over the general population is severely reduced. And lenders, naturally, will want to accept an all cash offer, further reducing their risk and overall exposure on any given property in their short sale portfolio.
Another negative to consider, is that you’re uniformly purchasing any short sale in “as is” condition. So once you get an accepted offer, make sure your house inspector’s report is quite thorough, and you can anticipate a sufficient amount for fix-up and/or maintenance issues with the property. Certainly, the seller and their lender will not be making any further improvements.
How best to find short sales
One can find short sales easily enough looking through your local Multiple Listing Service. Their will be a category for short sales where you can run a search based on this criteria, and meld it with your other search criteria, such as price and location as well. Your local Realtor can also provide assistance in your search.
Who short sales work best for
Short sales work best for more experienced investors with deep pockets, who can make all cash offers, and, having crunched their numbers properly, are prepared to wade through the bureaucratic red tape that lenders throw at you when bidding on their portfolio of short sale properties.
Who should avoid short sales
If you don’t have the time and patience to negotiate, then wait for 6 months or so, then short sales are not for you. In addition, if you’re not prepared for the increased competition from other investors, as well as running into many counter bids that are all cash offers, stay away from short sales.
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