Mortgages & Creative Financing

When Buying a Short Sale as an Investment, Remember the Boy Scout Motto

79 Articles Written

There are some great deals out there for investors looking to buy distressed properties—foreclosures and even short sales. But, there are a few things that investor buyers need to be aware of when looking to purchase short sales.

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The investor who is buying a short sale and then plans to ‘flip’ or resell the property immediately needs to be cognizant of the terms and conditions of the short sale approval letter. Certain mortgage servicers (such as Bank of America, Chase, and Wells Fargo) place limitations on the terms and conditions of the short sale approval that may impact an investor buyer’s ability to immediately resell the property for a profit.

Some investors purchase short sales in order to hold onto them and rent for profit. With sales prices at historic lows, many residential investment properties purchase in the current real estate market can see annual returns of over 8 percent. Know, however, that mortgage servicers approving short sales may not permit the buyer to rent the property back to the current seller (the borrower in the short sale). Some lenders even require that affidavits be signed by buyers, sellers, and agents verifying that a rent back will not occur.

A third concern for investor buyers may arise with respect to disclosure. Not only is the buyer required to disclose that he or she may be immediately reselling the property for a profit, but other disclosures may be required as well. Many times second lien holders in short sales require a cash contribution in order to agree to the terms and conditions of the short sale. Frequently investor buyers are able to contribute that extra cash in order to get the deal approved. Any cash contribution to the second lien holder needs to be disclosed on the settlement statement and approved by the first lien holder (if the first lien holder is also accepting a short sale).

While a short sale can be an excellent opportunity to pick up a nice property at a good price, it’s important for buyers and their agents to do their homework. Nobody wants to get into a situation where they wait around for several months and then the deal goes south. And, nobody wants a deal to come back and haunt them several years down the road.

It’s hard to predict what the upshot of this wacky real estate market will be several years down the road. And, since I do not have a crystal ball, I guess the best thing to do is to adhere to the Boy Scout motto and ‘be prepared.’


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    John Evan Miller
    Replied over 8 years ago
    I am very glad that you mentioned the importance of understanding that flipping a distressed property purchased through a short sale may not be as simple as it sounds and definitely requires a thorough reading of the documentation. I feel this is something that is often overlooked and may leave investors in a bind.
    Matthew David
    Replied over 8 years ago
    Melissa, even today there are still ways around the common restrictions of the bank. For instance, if you aim to buy the property as a short sale and do so into a real estate trust, you can sell the trust without actually reselling the property. There are legal loopholes that can make it work still but you’re absolutely right, the banks are getting more and more hip to investors disclosing their intents.
    Replied about 8 years ago
    This is valuable information for our investors here in Santa Barbara looking into short sale properties. Definitely information we are communicating as well. So so so important to have this information available for buyers in today’s market! Thanks Melissa.