Interesting Dynamics of Short Sales

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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.

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

7 Comments

  1. As a Realtor/investor I know first hand short-sales can be a pain, however, you can really get a good deal. Also, I’ve seen more and more short sales in my area as well. Hopefully, the new law that went into effect July 1 where the bank must respond within 60 days is a major improvement. I’m waiting on approval now that has been in the process for over 4 months now.

    • Agreed. The new 60 day law will be a big help to all those looking to buy short sales, as well as those looking to actually short sale their home. I know someone who has been waiting for over a year now for the bank to approve the short sale of their home. Hopefully, this new law will kick start the process.

  2. I’ve been trying to find out how the new law will effect someone in the middle of a short sale. From what I’ve seen it doesn’t apply.

  3. Hi Ken!

    Great points you have discussed above and when it comes to foreclosure vs. short sale I preffered to go the short sale option reason is the same as you mentioned above in the article, atleast that gives the chance to check the property.

  4. I am noticing that the “quality of the deal” is hinged upon the BPO (Broker Price Opinion) that is done on the short sale listing. The banks put a lot of stock into this number. Unfortunately, I have seen very few short sale deals at prices worthy of an investor’s look. Usually, they are just pretty good deals for homeowner-buyers.

  5. Just want to point out that the banks can file a deficiency judgment with both a foreclosure and a short sale.

    Relinquishing the deficiency judgment is absolutely something you must negotiate in your short sale agreement with the lender.

  6. A deal should be made by the home-owner and the Bank in order for the house to be sold. Sometimes the problem about it is that the house had 2nd loan in it. Still, the process of selling the house will took a while than the usual thing. This is because a third person will be involve in the process (which is the Bank). With the short sale the seller has full control about the property, even in the decision making.

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