Short sales can be an amazing investment strategy, but they have their own set of rules to follow.
For one thing, short sales have changed a lot since we started investing. Back when we started investing in 2012, there were tax breaks to forgive the debt, so people would take almost ANY offer because they just wanted to get out of debt. Some programs even existed to pay people to give up their house.
Boy, have times changed!
Now, people have to pay capital gains on the “forgiven” amount of the loan. This has caused many homeowners to be much tighter in what they will offer. I have seen short sales try to get the same price as houses at market level. When we bought our short sale in California, the vast majority of properties available in neighborhoods were short sales, so people learned to suck it up and deal with the process. At the time, the process was fairly short; it took 52 days from offer to close in California.
Related: Interesting Dynamics of Short Sales
While short sales have dramatically decreased in the last 18 months, it has actually had a positive effect on short sales for investors. Many “personal property” home buyers will no longer buy them. There are enough traditional sales for people to avoid the process.
The cons of short sales that may discourage buyers include:
- Tons of paperwork
- Very slow 3-12 month time period
- Value could come back much higher, so the deal could be off
For those who still decide to give it a try, the process is as follows:
A 5 Step Summary of the Short Sale Process
1. Deal With Short Sale Homeowners
At the same time the nature of short sales has changed, short sale sellers have changed, too! Back when the loan was forgiven and there was no tax on the discharged debt, homeowners would accept almost any price with the idea that bank would settle it. Now the homeowners will fight with the buyers to get them up as high as possible. Low ball offers are much harder to get accepted because they don’t want to pay the tax.
2. Wait for Bank Approval and Closing
Well, first you wait, and then you wait, and then you wait some more. It usually takes 3-12 months to close on a short sale. The nice thing is your earnest money isn’t due until you have bank approval.
You are also not required to stay with the house for more than 30 days. So if you find a better house, you’re fine. On the other hand, if you don’t come across a better property, you still have the one that you are waiting for.
3. Receive BPO and Bank Approval
At this point in the process, the bank gets a BPO (Broker Price Opinion) or essentially an appraisal of the house value. These can come in all over the ballpark: from low to high to right on track. The best you can do is wait and see!
If the value comes back to high, no worries; you can back out! If it come in right on track, you receive bank approval. You are on to the next hurtle!
4. Get House Inspected
You are now able to get the house inspected. The difference in this process versus other processes is that the house is AS IS. The bank will not cover any costs at this point. The sellers are not making any money off the sale, so they don’t want to spend any money fixing up the property, either.
I always tell people to assume the deal is AS IS, so they will get in the habit of working all costs into their numbers. If you do get help, consider yourself incredibly lucky. If you don’t, then you are right on track with the rest of us. 🙂
5. Receive Appraisal
This is the only time you will see a price change or repair fixed. Oftentimes, if it is required by the financing institution, the bank will sometimes cover it. The bank will also in some situations lower the price if the appraisal comes back low, depending on the type of financing. FHA and VA are considered much stricter than conventional loans, with VA loans sticking for 6 months. So in the end, it’s really a guessing game.
Okay, so if you made it this far, you may be wondering why we even buy short sales. They seem like a pain in the butt.
Related: Short Sales – How to Manage the BPO
Here are a few pros to buying short sales:
- Long Time Frame: There are many cases where people like having the house picked out to purchase down the road. As an investor, I find it great because I can pick out my house and purchase it later. As a personal property owner, I also enjoy this process because it has allowed me to put an offer in at the beginning of a deployment and buy it many months down the road when deployment ends.
- Relatively Good Condition: Our first house was a foreclosure. The people were so upset, they destroyed it by taking things out of the house. Most short sales are in pretty good condition. The owners are voluntarily giving up their home. The prices in our experience are very close, but the lack of work makes short sales much cheaper. It also makes it easier on us long distance landlords because we don’t have to worry about finding handymen in other areas.
- Deep Discount: On the first foreclosure we purchased, we got a discount because we put a ton of sweat equity into the house. While totally possible at the time, this method would have been A LOT harder to continue indefinitely. While short sales involve much more paperwork and red tape, we have been able to buy them 5-20% under value with VERY little work. Personally, I would much rather “manage” the buying purchase than deal with repairs.
In conclusion, while short sales are a beast in their own right, for those who understand their processes, they can be an amazing investment.
What has been your experience with short sales?
Let me know in the comments below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.