Short sales are out of vogue and perhaps that’s exactly where they should be in a market with rapid appreciation and multiple offers on ‘turn key’ homes drawing most of the attention. But investors should always being thinking out side of the box and out of favor short sales might be actually be a bright idea.
Trying to make short sales your exclusive source for investment properties isn’t a good strategy in today’s market but before you even begin studying this market, your plan should be for the process to take about a year from the time you initially contact the primary lender with an offer for less than the outstanding loan balance. That long gestation period is why these should be back burner deals rather than one you need to take home a paycheck from next month.
CoreLogic’s most recently updated Cash and Distressed Sales information in January. Short sales made up 2.6 percent of total homes sales last October. Including REO, distressed property sales made up 7.7 percent of all sales in October. Well below the peak of 32.4 percent in 2009.
Don’t be surprised to find multiple lien holders on the property in addition to the primary (1st lien). There could be a second mortgage, property tax liens, unpaid HOA fees, and/or improvement/repair liens. These lien holders typically receive a minuscule fraction of what they are owed if anything but they need to sign off on the liens so that you receive a clean property title. When the primary lien holder isn’t going to receive all of their loan proceeds, they won’t be eager to share with those at the back of the line.
It’s settling with all the lien holders that takes up to a year (or more) to bring the deal to the closing table. Typically, the investor/buyer reaches a deal with the primary lender and the primary lender decides what to offer other lenders to close the deal. All of the lenders understand any offer at all is going to be few and far between. Your persistence and their fear you will walk away from the deal is the lenders biggest motivator to accept substantially less (something is better than nothing) than is owed.
If the primary lien holder refuses to offer enough to other lien holders, you may be asked to put more money into the deal. Additionally, you probably have more expenses after closing the short sale. Along with your planned renovation costs for a flip, include all needed repairs and deferred maintenance. In many cases, a short sale will be in better condition than a REO sale because someone has likely occupied the property recently. But you should expect at least some deferred maintenance.
Be careful regarding what the deal will ultimately cost you and how much you’ll get out at the end. When you hear ‘short sale’ don’t automatically assume ‘fire sale’. Always remember you have options, be it a good deal on a fixer-upper in all sale types – whether it’s a short sale, foreclosure auction, REO, or traditional listing.
Finally, be aware that an underwater mortgage isn’t the only requirement for a possible short sale. You still need a willing owner/seller that will walk away from the deal without receiving a nickel at closing. The lender is going to demand the seller show substantial hardship and the seller needs to fully cooperate to prove the hardship. Lots of players playing ‘deal’ or ‘no deal’. Be sure the payday is worth your effort.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.