What are the pros and cons of a short sale? So many people seem very afraid of short sales, why is that?
Short sales have been time intensive endeavors with many of the lenders. Seems that there are big turn-overs of the asset managers, one of my clients had counted and he was on his 17th. If you are diligent and get the right contacts from the lenders side these can turn out to be very profitable. But know that sometimes they still end up in a foreclosure which to me, just wastes everyones time.
Short sales are usually the option of homeowners to avoid risks.
- Short sales allows the homeowner to avoid foreclosure, the legal process used by lenders to enforce payment of a mortgage debt.
- Lenders can obtain deficiency judgments after a short sale in some states.
- Short sales are usually anything but short. Because the bank has to approve the offer (rather than just the seller), escrow can last for months and months.
- You’re buying the property “as-is”. Neither the bank nor the seller are going to negotiate for any repairs that are needed.
From a buyer's perspective, short sale can be good because it can be cheap. Bad is that it sometimes can be long (varies, I had one done in 3months and another one more than 2 years and still not done). BUT if you always have some shortsales in talks you will be just fine.
It is almost like fishing and you cast multiple nets and check them periodically.
Pros of a short sale for distressed homeowner are (in FL):
- Avoid foreclosure
- It's a permanent solution
- Potential for HAFA relocation assistance versus getting kicked out by the bank
- Good negotiators get the bank to waive their right to a deficiency judgment
- Credit impact is low compared to foreclosure. What really kills them are all the missed payments up to the point of the short sale is successfully closed
- Credit reports show the mortgage as an account paid in full
- Can buy a new house within one day of a short sale
- Eligible for an FHA loan within 2 years versus 7 years with foreclosure
- Keep government security clearance
- Get your dream job because they're are no foreclosure on your credit history (yes, companies can check your credit history)
- Pay less on every loan you get for the rest of your life versus elevated interest rates with a foreclosure on your credit history
Pros for an investor buying short sales:
- Bank usually takes a discounted amount for a property
- Can control the offer amount and the way its negotiated
- Can control your deposit amount (no need for +10% down payment)
- Good negotiators can get you a good deal
- Can send in a contractors report for further discounts
- Plenty of people that need help = lots of potential deals to be made.
- Be a hero to a family that thought foreclosure was the only option out!
People seem afraid of short sales because there is a lot of uncertainty regarding what price the bank will ask for. The bank is associated with money and power and that might intimidate some folks. When you consider that negotiating with a bank is like dealing with someone that has (basically) unlimited money and resources, you can see why some people might just not want to deal with a bank at all.
Homeowners may be afraid of selling their house and have substantiated fears of where they will live next and how they will pay for the deposit, 1st and 2nd months rent.
Another reason may be that short sales generally take anywhere from 3 to 6 months and can possibly take longer leaving a potential buyer hanging for longer than expected (as an investor, this shouldn't matter as you should be filling up your pipeline with deals)
That's all I can think of for now. Check out my page AntlopMiami.com. I am the premiere short sale buyer and short sale specialist in Miami.
Thank you for reading.
Short Sales are scary because there is no certainty with them. You are dealing with both the seller and a bank/3rd party. As with anything risks can have their rewards. We have bought 5 short sales (although many more than that have fallen through). We have gotten great deals, but there is definite sweat equity through dealing with the red tape!
Feel free to pm me if you want to talk about it more in detail. I have also written a ton of article on the subject on this BP and on my website!
@Antonio Lopez excellent response! I've been doing short sales since late 2007, specializing in high end vacation properties on the Alabama Gulf Coast. The only things I can add to your post are:
In my experience banks will typically take 15% to 20% less than the current market value for a property, because of the uncertainty of what a foreclosure will bring for them. In Florida, of course, you have that extremely lengthy judicial foreclosure procedure that can be tied up by a borrower for a couple of years. Banks HATE that.
It is critical that you control the appraisal or BPO process. Take the lock box off the property, and force the appraiser to make an appointment to see the property. At that time, present the appraiser with your market research. For a condo, as an example, my research consists of a census of every single condo on that complex that's sold within the prior 3 years. I don't typically give ALL of that to the appraiser, but if the prices are right, I do. For the ones with high prices, I have comments that show the reason--custom finishes, fully furnished, unusual buyer, etc. I want the appraiser to have complete and accurate information to see that the market is lower than he/she might assume with a cursory market review.
I once had a short sale denied on the basis of price. I contested it, and the bank wanted non-foreclosure and non-short sale comparables within the prior two years. I presented evidence that 38 of the 60 condo units had been sold in the prior two years, and every single one of the "sales" had been a foreclosure or a short sale. They approved my price!
The process is lengthy and somewhat labor intensive, but the rewards are huge.
Can anyone recommend a short sale specialist in Houston, TX? Thanks!
Would a short sale be good for a first-time investor?
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