Investors Guide to Buying Short Sales

What investors need to know when buying a short sale!

A short sale is when a property is sold for less than what is owed on the balance of the mortgage(s), with the lender approving a short payoff on the full mortgage balance. Short sales are not quick by any means, so don't be fooled by that name. The short sale approval requires a multi-step process which usually takes a few weeks to months to complete.

As an investor purchaser buyer in a short sale situation there are some key points you should know in advance:

TOP INVESTOR TAKE AWAYS:

1. 1. In almost 100% of all short sales the lender will require the property was listed in MLS by a licensed real estate agent. This means that not only can you not bypass the Realtors or attempt to buy a short sale FSBO, but also that professional representation is available to you at no out of pocket cost. Use it wisely and find a qualified professional with short sale experience to help you.
2. 2. Wholesalers and short sales generally don't mix. Short sale contracts can't be assignable and short sale approval letters are name specific, so changing buyers mid course is not easily accomplished. The lender will usually issue some deed restrictions for a period of time from closing to prevent quick title flips after close as well. Furthermore, due to close lender control of what closing costs are allowed to be disbursed from the sale proceeds, there likely won't be a way to get any wholesaling fees covered in these transactions. Selling directly to the end buyer is ideal.
3. 3. All lenders require appraisals or BPO's of the property being sold. Someone will come out to view the home’s condition and check out comps. The purpose of this is to give the lender a current market value on the property. This is the number they will use to approve or counter your contract sale price. The margin on this value is not very large, so it will be highly unlikely to get huge discounts from market value, especially on properties in good condition.

Still wanting to move forward? Okay here’s what to do make sure the process goes as smoothly as possible:

QUALIFY THE AGENTS!

Since you’ll have to have one anyway, find the best you can!

The Seller's Agent: The single most important person in the short sale is the listing agent for the seller. Unless a third party company is being utilized for the short sale (usually not a great sign for the agents experience level), the listing agent will be doing all the heavy lifting on the short sale and communicating with the lender. If possible, research their history in selling short sales or have your agent ask some basic questions about their expertise in this area. An inexperienced agent can easily fumble up an otherwise approvable short sale, or lack the experience to overcome common problems.

The Buyer's Agent: While the buyer's agent has limited direct control of the short sale process, a buyer's agent experienced with short sales will know how to qualify the seller's agent, and understand the steps and timeline of the short sale to be able to guide you through the process and anticipate possible obstacles.

GETTING THROUGH THE PROCESS:

Be patient: The short sale approval process generally takes 2-3 months if all goes well the first time. That means you are probably looking at a 3-4 month timeline from contract to close, if approved. Timelines can be unpredictable, so if you have a strict time requirement, short sales are not for you.

Do inspections upfront: Once the short sale approval letter is generated, there will be no more price negotiations. It is critical to do your inspections upfront and document and negotiate any condition issues prior to approval. Not only will being aware of condition issues help you understand what you are facing, but having documentation of any necessary repairs prior to appraisal is critical. That way the short selling lenders appraisal can be made aware of the issues and consider them in their valuation.

Be ready to close: While there is some waiting required for the short sale to be approved, you should still have most of your financing legwork and inspections done before the approval so that once the approval letter is generated, all that is left to do is for all the parties to close. Short sale approval letters generally come with 30-45 day expiration dates.

If you are willing to be patient and flexible, short sales may offer you a chance to get a home for a discounted price, or more home than you could normally afford. The key to success is being prepared and choosing the right help!