Should I be Investing with a Time Machine?

28 Replies

Now that I got your attention, let's talk about Short Sales and whether/when they are a good fit.

First, some context:

A Short Sale is when the NET proceeds from a Real Estate SALE will fall not cover the DEBTS secured by the liens against the property. If ALL of lien holders agree to take a lesser amount than what is owed, the sale will proceed.

So... If the homeowner is too far behind in their payments to catch up AND the home is worth less than the mortgage because of the market value. 

The big thing is that a Short Sale is initiated by the homeowner/seller BUT has to get the lender to agree. A Foreclosure is the Lender/Bank has taken ownership of the property and now controls it, seeking to get back as close to the original loan amount as they deem appropriate. Now...

To my question/topic of discussion.

Since Short Sales take SO LONG to simply get an answer back to an offer, Is there a time when it's appropriate to pursue a Short Sale knowing and/or hoping another deal will pan out and provide the capital to close on a SS if the offer is accepted in the future, preferably when the market has risen a bit and I've hopefully locked in a past price? Like investing with a Time Machine.

Current Example: In approximately 6 months, I will have proceeds from a flip. If I come across a good deal that is a short sale, where the down payment on the offer I make will be covered by my current flip proceeds [assuming the bank and seller give the thumbs up], is their any harm in making the offer now?

As always I look forward to your thoughts!

@Adam Scheetz you will probably not have an offer accepted with a proposed closing date in September. Theres no harm in doing it, but think about it from the sellers side. Why would they want a property locked up for 6 months?

Another thing to consider.... short sale doesnt mean "below market value", it just means that the market value is less than the balance owes. You'll still probably be paying market value for a short sale. It's designed to benefit the seller, not the buyer.

@Jason D. Thanks for the response!

if the property only has a single mortgage, they are underwater, and can't make payments, and owe more than what it's worth, how's that not below market. If the house was worth more than what they owed they'd sell? I'm not following how you say there's no link to the lack of value of the property to the fact they owe more than a market will allow it to be sold. That sound like the definition of under market.

@Adam Scheetz the value of the property has nothing to do with the loan. The house is worth what the house is worth. In a short sale, that just happens to be less than the loan.

For example, I bought a house for $500k, the market crashes, and the house is worth $300k, that's it's market value, every other similar house is worth $300k, so you arent getting a deal because I owe more on it, you're paying market value.

There's a few issues with your plan:

1. Proof of ability to pay will be required upfront.

2. Seller will usually not accept a contract on a short sale which includes a contingency for a home sale.

3. Purchase price will not be locked in until approval (which is what the waiting is for).

4. You have no way to determine exactly when approval will come, but when it does you will need to close within 30-45 days.

5. You will pay market value or close to it. The lender will send an appraisal out to determine todays market value. The approval will require that number or close to it. The original loan amount is irrelevant.

@Adam Scheetz . You’re basically counting your eggs before they’ve hatched. This is a dangerous strategy in my opinion.

If your flip is taking 6 months, there’s a lot that can and likely will go wrong to delay that, some in your control and some not.

Most common examples are contractor overruns, project delays, rehab costs going over. If you avoid all that great, then you list it and it doesn’t sell. What if it takes 90 days to go under escrow and sell? I don’t think that amount is unreasonable. Have you accounted for all that? Lots of flips take a long time to sell.

@Minna Reid when you say Proof of ability to pay are you referring to a cash only purchase or already having a loan secured? Also, if the homeowners owe an amount X, and the home is worth Y, and X is more than Y, the lender can agree to an amount less than what’s owed to avoid the foreclosure process. What am I missing here. The other guy says that the home value has nothing to do with the loan and I never said it did, only that the relation between the two is what makes is a short sale.

@Caleb Heimsoth I’m glad you phrased that question the way you did. This is essentially where I’m wanting input from others. If the short sale offer is accepted and I’m not in a position to execute, what’s the harm. It took 6-7 months to hear back that they will accept it, oh dang I can’t do it, what are the negatives?

@Adam Scheetz

You will need to present a proof of funds or pre-approval letter from a lender up front. If you don't have the ability to buy the property without a future sale, you lack both. 

Yes the short sale is because the home is worth less than what the seller owes and the lender will have to approve taking the loss.

The lender will still want market value for the home, which will be determined by their own BPO/Appraisal.

Originally posted by @Adam Scheetz :

@Caleb Heimsoth I’m glad you phrased that question the way you did. This is essentially where I’m wanting input from others. If the short sale offer is accepted and I’m not in a position to execute, what’s the harm. It took 6-7 months to hear back that they will accept it, oh dang I can’t do it, what are the negatives?

Have you found a specific short sale you’re wanting to do this with? If not I wouldn’t worry about it.

If you have a specific out in your contract then true there’s no harm except maybe to your investor reputation.  

I was more saying I just wouldn’t bother with this because it’ll take your attention away from your flip. Which will likely demand a lot of attention at some point due to some unforeseen issue.

So you intend to just throw out offers to sellers in time sensitive situations, and waste everyone's time for 6 months and then decide whether to execute? Nice.

Any good short sale listing agent has a ton of contingencies to prevent exactly this from happening and you are not likely to have success unless you find an incompetent listing agent...

Even then you will still need to prove your ability to purchase upfront, and you will lose your deposit funds by breaching contract. 

@Jason D. I understand that I'm not getting a 'Deal' in the typical since of the word, but the condition that you find yourself hypothetically in is what opens the option for someone to come in, help you out by letting you stay in your home only as a renter, and negotiating with the bank for a predetermined amount. As long as that amount is less than [even if slightly] market value, and it cash flows, how is this a bad idea? You got a cash flowing property, occupied with hopefully a grateful tenant, and for less than what the former owner paid, and appreciation to be gained assuming you purposefully sought a SS in an appreciating area.

Like I mentioned in response to Caleb, it's not necessarily about the details of a hypothetical situation as much as it is about whether or not putting in an offer on a short sale now and planning on executing it later is a good or bad idea. If the flip doesn't go as planned or their is another reason why the short sale deal can't be done, so what? All I've done is make an offer right? What am I missing here. What obligations are there when pursuing a short sale?

@Minna Reid No need to be presumptuous or snarky. That's why I prompted a HYPOTHETICAL situation to generate a discussion. And how time sensitive is it if it takes half a year to even get a response or a counter offer back?

I asked what you meant by proof of funds? If you could clarify that that'd be great. You also mentioned deposit funds. How do those typically compare to a typical earnest deposit for, lets say a single-family home found on the MLS?

@Caleb Heimsoth No. No particular short sale. I was listening to a Podcast where someone mentioned putting in offers on Short Sales and totally forgetting about them, then 7 months later hearing back that multiple were accepted and they didn't remember even doing it because they had some much non-short sale volume. He mentioned how it was like buying in a time machine because the offers they placed were respective to the current market and level of upgrades needed. So when they heard back that the offers were accepted, they chose the best one and went with it. That's what sparked me thinking about it and wanting other peoples thoughts.

Originally posted by @Adam Scheetz :

@Caleb Heimsoth No. No particular short sale. I was listening to a Podcast where someone mentioned putting in offers on Short Sales and totally forgetting about them, then 7 months later hearing back that multiple were accepted and they didn't remember even doing it because they had some much non-short sale volume. He mentioned how it was like buying in a time machine because the offers they placed were respective to the current market and level of upgrades needed. So when they heard back that the offers were accepted, they chose the best one and went with it. That's what sparked me thinking about it and wanting other peoples thoughts.

How old is that podcast? There’s not a lot of short sales currently.  I personally wouldn’t waste a lot of time on this strategy 

If it's my listing - I can tell you will need to have proof of funds (bank statements showing the cash in your bank account) or pre-approval letter from a reputable local lender for an appropriate loan product, we will be collecting a deposit upfront (as much as we can negotiate, but it will definitely be more than you will want to walk away from), you will also be doing all your due diligence (inspections, mortgage application) once my seller signs (well before the lender approves), and failing to meet contingency periods will result in you losing your deposit with non performance.

My short sales close, and the buyers stick. That is because I do not let my sellers get caught up with buyers who are not truly vested. 

It is time sensitive for the seller as they are usually in default, and simply processing a short sale does not stop the foreclosure clock from ticking or from their credit falling apart. Its also a lot of work for the seller and their agent to go through a short sale. No one is looking to waste their time.

I am also getting the impression that you seem to believe values never fall. They do, and the fact that you bought a home for less than the last person did, does not mean you have a deal at all. It also sounds as if your plan is to keep the homeowner in the home as a renter. For a multitude of reasons this is unlikely to work also. 

And FYI short sales don't usually take 6 months plus. Sometimes they do, but not always. usually from the day a contract is executed to the day we are getting the approval letter is on average 2-3 months.

@Adam Scheetz I feel like you're thinking a short sale is similar to a foreclosure....

What you think will happen, wont happen. Why target short sales if you are just looking to buy market priced rentals? It's a hassle that you don't need to deal with, and you wont make any more money.

Forget the short sales, and focus on buying cash flowing properties.

@Adam Scheetz

Unless it was an absolutely amazing deal, I wouldn’t waste my time with a short sale. I don’t know many investors who do. Most SS’s by me end up going to foreclosure. And I definitely wouldn’t count my chickens before they hatched with waiting and banking on the flip $

@Caleb Heimsoth I think it was from early 2018. I'm not particularly interested in carrying out this strategy 1) because the areas I look I don't necessarily see a ton of them, occasionally some will pop up, and 2) I'm not really familiar with the ins and outs of the short sale game- hence the topic of discussion. Thanks as always for your feedback.

@Matt M. I agree. In the hypothetical example I provided, the flip profit was meant to illustrate options and possible consequences should it not come through. Minna Reid mentioned the loss of deposit, reputation, and likelihood of it not happening to begin with because a good agent would course correct the deal before it progresses. Thanks for you feedback!

@Minna Reid Thanks for that clarification. What I'm gathering is that the length of the short sale period is dependent a good amount on the agent and not solely on the lender acting? 

I was approaching the concept of short sales more so from a 'Helping the Home Owner' perspective. Perhaps I was wrong or naive in thinking that if someone is in danger of losing their home due to non-payment and are not yet in foreclosure, they'd be open to working with and investor and their lender in an effort to at least continue living in the same location with a lower monthly rent payment. The benefits of the 'deal' would start with whether or not you'd be solving someones immediate problem-losing their home.

Thanks for the response.

If someone who knows what they are doing is handling it it’s going to go a lot faster  and have a much higher chance of closing. Most realtors don’t know short sales at all, but many will still try to fumble through. So yes it is not just the lender that affects the timeline. 

Short sales do not always buy sellers extra time as simply being in a short sale doesn’t stop the foreclosure process most of the time. Most sellers short sell to avoid deficiency judgments (in deficiency states anyway) , or because they wish to not foreclose for various reasons. Buying time is almost never the goal.  I can tell you that in over a decade of working short sales and closing hundreds I’ve had maybe a handful of occasions where somebody wanted to simply remain in the home for as long as possible and needless to say that doesn’t align with my goal of selling the property so I never took those on. 

Most short sale approval letters come with addendum’s to prevent you from renting to the former owner so trying to keep these former homeowners as tenants is not gonna work out.

All of this varies by location. Short sales in NJ & NY take some time. I haven't ever done one within 2 months. Usually it'll be 3-4, sometimes 6. We're in judicial states. The foreclosure process is extremely long.

@Jason D. What is market value? I have done plenty of flips on short sales, sheriff sales, regular market purchases; etc. Short Sales have usually been for larger profit than the others. Yes there is an appraisal, but if you get a decent appraiser he should know the appropriate comps to take. If the appraiser is given the appropriate comps and shown all the issues with the house, the price should reflect that.

However, OP, I put tons of short sale offers bc I'm a flipper with the capacity to close on everything I'm going to put in an offer on. Im not sure it is worth it to go through all this, put down a bunch of emds, and only win one house for someone who does flipping on the side. I include short sales in a broader acquisition strategy to make sure I always have a flip or 2 (or 10) running at the same time and making sure I never have a gap. 

As an appraiser, I will pick my own dang comps, that is my job tanjooberrymud.

If you have properties for me to consider as comps, by all means give me the info at or before the inspection. Give me the info later, when you don't like the value...

You most likely shot yourself in the foot.

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