What is a Short Sale? Profitable Opportunities for Real Estate Investors
To an investor, buying a short sale can be a very profitable strategy.
A short sale is an alternative to a foreclosure for a homeowner, whereby the lender agrees to accept less than what is owed on the property. Having a mortgage on a property is referred to as a lien. In order to sell a property these liens must be satisfied and typically paid off in full. However, in today’s economy there are many people who are over leveraged on their home and owe more on their mortgage then what the property is worth.
Faced with this situation people who can no longer afford to make payments are in a difficult position, especially once mortgage payments are missed.
Once in default, the bank will begin to add penalties and fees and possibly start the preliminary foreclosure process. This is a difficult situation for a homeowner to reverse once started. This creates a very motivated seller because it can be very stressful and a very difficult situation to navigate.
As a real estate investor that is knowledgeable about buying a short sale, you can provide a solution to a distressed seller that can be beneficial for all parties.
What does a Short Sale Mean?
As investors, buying a short sale home can provide a big upside of immediate equity. You are already buying at a discount and if you add sweat equity or rehab the property then you can put that nice profit in your pocket.
There are many investors that will groan when you mention buying a short sale home but if you know the process it can bring in BIG profits to your real estate investment business. This can also play to your advantage for a number of reasons.
- Due to the overall time consuming and tedious process of getting a short sale accepted there is limited competition that will be fighting for these deals. As an investor your job is to make as many offers as possible and build a pipeline, many will not get accepted but if you have a system, this can bring in multiple deals a year.
- There are plenty of opportunities with sellers in pre foreclosure. You can use online sites like Realty Trac & Zillow, to find potential leads just by doing a search.
- Lenders are more agreeable than ever to accept short sales then in the past.
Why a bank accepts a Short Sale?
Foreclosure is a lengthy and costly process. In CT, where we do the majority of our business the foreclosure process can take months. There is also a big inventory of foreclosures filed and it backs up the courts. You should read up on your state laws regarding the foreclosure process and timelines because every state is different.
Connecticut happens to be a judicial state and the process to foreclose takes months, sometimes years. Believe it or not it is not uncommon for us to meet with sellers who have not made mortgage payments in over 2 years and still are living in their homes.
When a bank forecloses on a property sitting vacant for an extended time, the value and condition declines. A vacant property is an opportunity for an increase for vandalism, freezing pipes in winter time, flooding, mold, copper pipes get stolen, and in some cases squatters.
These problems all fall in the banks lap once they foreclose.
Having the property occupied by the owner while the short sale process transpires results in quicker turn around and a higher net price back to the bank vs going through with a foreclosure. It is also more favorable for the seller than a foreclosure in most cases and not a s damaging to their credit.
How to do it
When buying a short sale there is much involved to increase your chances of success but for an extended over view this is how you do it.
- You meet with a seller and they express the need to short sale
- Most of the time the bank will require the owner to list the home with a Realtor.
- Help owner or Realtor compile short sale package of the necessary paperwork for the lender
- Present the bank with your offer.
- Bank will review the paperwork and order and a valuation on the property called a BPO or Brokers Price Opinion or a full appraisal. The property needs be in need of repairs, do not expect a discount or a short sale on a property that is in good condition.
- As long as your offer is in a value range of about 85-95% of that BPO valuation you have a solid chance for an accepted offer.
Don’t get me wrong this is a very abbreviated version of how the process transpires.
It is condensed for this article but those are the critical components involved for the negotiation. Each situation is different; it takes time and experience to learn how to successfully navigate short sales.
Working with a cooperative homeowner is very instrumental because the bank will require the seller to provide a lot of documentation as to why they should accept a short sale.
Its a similar process akin to applying for a mortgage but in this case the bank is looking at the borrowers financial situation to make sure they can’t afford the property. Bank and Financial statements need to be updated monthly so having a seller who is organized and cooperative is essential.
Most of the time a Realtor will be compiling the paperwork because the bank will require the property to be listed, you will just be submitting your offer through the agent and they can negotiate with the bank on your behalf to save you the effort.
If the agent involved is not familiar with short sales I do not recommend wasting your time, the chances of it going in your favor are slim. Find a good agent that works in distressed real estate at a Real Estate Investors Association or they have short sale accreditations or have a long track record completing short sale transactions.
THIS IS IMPORTANT: There are a number of factors that will play into your odds of getting a short sale accepted but a majority of that weighs in on the BPO or the independent valuation.
Make offers on houses in need of repairs and ideally that will not qualify for conventional financing this increases your odds. If the house needs a lot of work chances are that will be reflected in the appraisal and if it does not qualify for financing that will limit the buyers available for that property, thus making your offer more favorable to the bank.
Lastly before you even make your offer and go through all the motions of putting a short sale package together due a quick market analysis and see if the comparable sales in the area will support your offer.
If after you calculations and due diligence you determine a purchase price that is nowhere close to any of the available comparables, it is very unlikely the valuation will come back in your favor and you will have a hard time justifying your offer to a bank negotiator.
Conclusion:
Short sales can add an additional stream of deals to your business. There is a lot of dynamics to getting a short sale completed. Having someone on your team who is familiar with the process can be a huge opportunity to land more deals for your business.
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To Your Success, JB