It seems that in recent months, there is a shrinking foreclosure inventory and a shift towards more short sales. I know in our business, we are buying more and more short sales as a result of the changing market. With the increase in short sale business, we have found that there are a different set of challenges, but also different opportunities.
Short Sales vs. Foreclosures
One of the biggest differences between buying a short sale and buying foreclosures is the presence of the homeowner in the transaction. With foreclosure transactions, the bank has taken the house back from the owner and will typically market the house “as is” (which is usually in some sort of distressed condition . . . especially if the house has sat vacant for any amount of time). However, in a short sale transaction, the owner is often-times still living in the property. This gives an investor a tremendous advantage in assessing a property as compared to buying a distressed foreclosure.
For instance, if the property is occupied, the furnace and/or air conditioning system is probably working (this can be one of the biggest expenses associated with rehabbing). In addition, a house that is currently being inhabited will likely have functioning electrical and plumbing systems. Again, where this may be a mystery with a distressed foreclosure, the interaction with the homeowner during the short sale will typically enable the investor to fully assess the property before the purchase.
Negotiating Short Sales
Another interesting dynamic with short sale transactions is the ability to negotiate with the homeowner. Understand that most homeowners in that situation are very motivated to structure a short sale as the impact on their credit is much less than a foreclosure (as well as a possible deficiency judgment associated with a foreclosure). As a result, I have found that there is opportunity to ask for a little more from the homeowner than you could with a foreclosure.
For example, we are closing on a short sale tomorrow where we specifically outlined in the contract that we wanted the homeowner to leave the appliances (because they happen to be newer stainless steel appliances) as well as their washer and dryer. Not surprisingly, the sellers agreed to this as they were highly motivated to make this transaction work. This will save us over $1,000 on the cost of new appliances as well as another $400 from selling the washer and dryer.
Short Sale Tips
As an aside, we went by the house today and discovered the homeowners had moved out and taken the washer and dryer with them. This underscores two very important points when it comes to buying short sales:
1.) Always document in the contract exactly what you want from the sellers. In this particular instance, the selling agent tried to assure us that the sellers would leave these items for us, but luckily we were insistent that they sign our addendum specifically outlining our request.
2.) It is always a good idea to check the condition of the property either the day before or the day of a closing. This is true for just about any real estate transaction, but especially foreclosures and short sales. You never know if the condition of the property has been materially altered in any way unless you view it for yourself before the closing.
Short sales aren’t necessarily my first choice for acquisitions, but as a real estate investor it is important to understand the market you are in and work with what you’re given. While there are a different set of challenges associated with these types of transactions, it is important to find the benefits and use them to your advantage.