What to watch out for on short sales?

8 Replies

Hi guys,

I m new to real estate investing. I have listened to a lot of BP podcast shows and I m about to take my first step of buying my first rental property. The only problem i m running into is that i m very interested in this one property which is a good deal but is a short sale. Now since this is going to be my first deal, I m kinda worried about it . What would be some things I should really be aware of if I did want to get involved in this property? Any information or advice would be greatly appreciated. 

Thank you everyone in advance.

I’ve bought multiple short sales. The biggest thing to be aware of is that it will typically take longer to close. Other than that it’s really not that different from a non-short sale purchase from the buyer’s perspective. 

One important thing to know is that the list price of the home is set by the listing agent, NOT the bank..  At the point of being listed, its likely that the owners lender doesnt even know its listed for sale.. Agents have differing strategies when listing short sales depending on the sellers situation.. You MUST know that whatever price you have an accepted purchase agreement at, DOESNT mean the sellers lender will necessarily sell at that price..  The sellers lender will do their own appraisal, and may feel its worth much more, or need to recoup much more than the current agreed sales price..  Especially if the market is rising.. You could wait 10 months for the short sale approval and if values have risen 8% during that time, you're likely going to pay considerably more for the home than initially agreed upon, if you still qualify..  

Also, the home could have a sale date and go into foreclosure at any given time, or not successfully postpone a known sale date, so you could wait for months only to have the rug pulled out from under you at a moments notice

Back during the recession, i had buyers wait several months on a short sale.. Only for it to get approved and they finally get to do their inspections etc, and show up to the house to find the AC unit and appliances stolen and poof, deal dead..  

So many variables, gotta have some thick skin for that potential roller coaster ride.. Good luck, you could get a decent deal though if it all works out!

@Kyle J. thank you. Makes me feel a little better now for sure. I was just trying to make it too complicated I guess. Thank you again.

@Brandon Carriere wow a lot of good info. Thank you man. I appreciate that. I think you talked about going into foreclosure. So short sale is not something that has gone to foreclosure yet??? And do I have to look out for any liens??

Again thank you so much for your reply guys.

@Arpan Gurung

A short sale is a pre-foreclosure option (provided there's a legit hardship) for an owner to get out from underneath a home thats worth less than they owe on their loan..  And typically, once a bank gets notice of an offer and receives a sellers short sale package (an application some would say) this will usually delay the foreclosure date..  

Any liens should be found by the title/escrow company.. Thats what you're using and paying them for.. Its not uncommon for short sale sellers to have back HOA liens, taxes, and other issues.. Usually the sellers lender factors those in the calculations for the short sale, but sometimes the buyer will have to pay some or all of those..

Its not uncommon here in Vegas for short sellers to rack up $5-10k in delinquent HOA liens as the HOA have ridiculous and exponentially compounding late fees.. Sometimes buyers are required to pay that on top of the sales price, so thats something to keep in mind..

Good luck!

One often overlooked but important item as mentioned is finding out about additional junior liens Before making an offer. An experienced SS agent will have an idea if the buyer will have to “contribute” extra money to help pay off a settlement with these, and structure your offer accordingly.

If the listing agent is on the ball, they have already done that.

Another “BS thing” that may have gone away or may have been a Vegas only thing is a $5-$10,000 “negotiation fee” charged by a “lawyer” representing the seller. That is always charged to the buyer, at least here. 

Ive have horrible experiences (bank took months between updates even though we have a law that says they have to respond within 30 days, because if you demand a response, guess what it will be.) it took 10 months to get a final agreed upon price. DOUBLE THE ORIGINAL ASKING PRICE.  I’ve had them go to auction less than a week before closing.

But, I’ve also had banks pay off $10,000 property tax assessments for neighborhood improvements, just by asking. It’s a mixed bag one as you expect it could take t months to a year and things change constantly. You have a big leg up on a buyer that wants to live there and needs concrete answers. 

Basically you're going to have to wait around for approval (or not approval).  This could be 2-6 months.  You'll want a clause in th contract that you'll agree to wait a max 3 months then have the option to decide to continue to wait or extend the waiting period.