Buying a short sale can be a great way to make a smart real estate purchase, given the conditions in today’s market. More frequently, home buyers want to look at nothing but foreclosures, REOs, and short sales during their real estate search. However, just because a property is being sold as a short sale, or some other form of a distressed asset, does not mean that it is necessarily a good purchase. This article will focus on the top three mistakes to avoid when buying a short sale as a residence.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Short Sale Mistake Number 1 – Don’t Fall in Love with the Property
Real Estate is an emotional purchase. As a matter of fact, most purchases are emotional purchases. When we make emotional purchases, we do a funny thing. Many people don’t realize this, but when we make emotional decisions we tend to justify those decisions with logic.
For example, I want to buy a four door Jeep Rubicon. I like them. I want one. The other day I thought to myself that it might be time to buy that Jeep solely based on the fact that our economy was in such bad shape. I started thinking that I could probably get a really good buy right now. I even started thinking that if I end up waiting a few years that I will probably end up paying more for the same Jeep that I could buy now. So I should buy one know. In my head, I am trying to logically justify an emotional decisions.
The same thing happens for home buyers, only the emotions when buying a home are a lot stronger (typically) than when buying an automobile. Some common logical justifications for emotional home buying decisions that I hear are:
- The house is pretty expensive but it is closer to work and we can save money on gas
- We might lose money when we our current home now, but we can make it up on the purchase of a new home
- The house is smaller, but that makes it easier to clean
- That extra bedroom would be great if (fill in the blank) ever had to come to live with us
Don’t Be in a Hurry
- “Tell the lender that we are paying all cash” – they dont’ care if you get a loan or not, it’s all cash to them
- “Tell the lender that if they don’t decide in the next week then we will walk” – in this case, it’s not that they don’t care, they just don’t have a method to leap frog your file in front of tens of thousands of other files
- “Tell the lender that we will purchase it as-is” – that is fine with them, they weren’t going to fix anthing anyway
Real estate riches are commonly created when people by real estate below market value. Market value is easy to determine, if you have the data. If you do have the data, market value can be found by looking at two factors: what is currently for sale, and what has recently sold. If you don’t have the data (or are working with an incompetent agent) then market value may be determined (or mis-determined) with false data sets. For example, here is a list of things that don’t affect or indicate value, but are commonly referenced by “experts”:
- Unpaid pricinpal balance: what is owed on the property has nothing to do with what it is worth
- The Tax Assesment: what the property appraiser says a property is worth means nothing (unless he is buying the property)
- Property sales that are more than 90 days old: the current real estate landscape changes so fast, a comparable sale from six months ago is no longer comparable.
I suggest considering the home values from 2002-2003 when buying a home. The values from these years generally indicate “pre-boom” values. They are more closer to “normal”. These values should not be solely considered, but should be referenced as a sanity check. If you can buy today, at the price from 2002, then you are most likely looking at a relative good buy. This happens fairly regularly in a short sale transaction. Lenders know to discount the properties to a point that makes them attractive to buyers. This usually means discounting them to “pre-boom” values.