Key Takeaways
- A short sale in real estate is also referred to as a pre-foreclosure sale.
- Short sale properties have a unique set of advantages and disadvantages, for both buyers and sellers.
- Investors should get to know the real estate short sale process before making their first attempt.
As an investor, you have probably come across potential foreclosure deals, but have you ever considered real estate short sales? Although short sales can be rare to come across, the payoff for successful deals cannot be ignored. Below you will find a rehabbers guide to real estate short sales, which can help determine whether or not short sales are right for you and your investing business.
What Is A Short Sale In Real Estate?
A short sale in real estate, also known as a pre-foreclosure sale, is a scenario in which a house is sold for less than the amount owed on the mortgage.
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Real Estate Short Sale Definition
Real estate short sales occur when the total of the sale amounts to less than the amount owed on the property. Usually, this is made possible when both the lender and the borrower agree that selling the property is preferable to the borrower being forced to default on the loan. However, by selling the property for less than the amount owed on the mortgage, both parties must agree to absorb a loss.
Real Estate Short Sale Example
Let us walk through a real estate short sale example. In this scenario, Mr. X took out a mortgage loan for $500,000 several years ago in order to purchase a home. However, due to some unforeseeable circumstances, Mr. X starts falling behind on his monthly mortgage payments. To make matters worse, a recent crash in the housing market caused the value of his home to drop down to $350,000, which is less than the amount he still owes on his mortgage.
Mr. X wants to avoid a foreclosure at all costs because it will appear negatively on his credit and could also force him to go into bankruptcy. This leaves Mr. X with the option of a short sale, where he can sell his home at the current value. However, this will work if and only if his bank will agree to absorb the outstanding balance on Mr. X’s mortgage loan. Although Mr. X will lose out on the original value of his property, he will avoid having the foreclosure appear on his credit and will no longer have the pressure of making mortgage payments that he can no longer afford.
Real Estate Short Sale Vs Foreclosure
As described in the scenario above, both real estate short sales and foreclosures are options available to homeowners who find themselves in unfortunate predicaments. For example, they may have fallen behind on their mortgage payments, have a home that is worth less than the amount owed on their mortgage loans, or sometimes worse, both. In these cases, homeowners may be forced to choose between a foreclosure or a short sale. Before proceeding, homeowners should understand that both options have different timelines and outcomes.
Pros And Cons Of Investing In Short Sale Properties
The pros and cons of investing in short sale properties varies based on the role played in the process. For example, the current property owner, the seller, has a very different set of advantages and disadvantages from that of the potential buyer. We discussed the pros and cons for the short sale seller through the Mr. X scenario, so the following discusses the pros and cons of investing in short sale properties through the lens of a buyer:
Pros For Buying Short Sales:
- Good Condition: In the case of a foreclosure, homeowners can get very upset and destroy the condition of a property. However, in the case of a short sale, the seller is voluntarily participating in the deal. In most cases, short sale properties will be in relatively good condition compared to a foreclosure property.
- Time Frame: The short sale approval process is often slow, which can also be considered a con. However, this gives investors the extra time to prepare the necessary financials, rehab estimates, and lists of contractors while they wait for approval.
- Discounts: Although investors can often purchase foreclosure properties at a deep discount, it often requires a lot of work. On the other hand, short sales offer investors an avenue to purchase a property below value with relative ease. Although short sales involve waiting for approval from the bank, they can usually receive a significant reduction in closing costs and other fees.
- Emotional: When it comes to foreclosures and short sales, in either case the homeowners are often distressed due to personal circumstances. When investing in a short sale, an investor can get a good feeling knowing that they’ve helped the seller avoid foreclosure, and that they have helped protect their credit.
Cons For Buying Short Sales:
- Competitive: Short sales are popular investment option for many buyers because they offer deep discounts and are often in better condition than foreclosure properties. Because of this, competition can be fierce between investors, especially in hot markets.
- Slow: It can take the bank a very long time, oftentimes a 3 to 12 month waiting period, to approve the short sale price. This requires the investor to remain patient and hope that the deal is approved.
- Hurdles: In addition to the bank taking several months to approve the short sale, investors should be prepared to fill out a lot of paperwork and go through a lot of red tape put up by the bank.
- Unreliable: Because short sales take so long to be approved, they are known to fall through fairly often. For example, if the bank counters the short sale price with a higher value than expected, the deal could be called off. In addition, a high proportion of sellers will not respond to short sale marketing. Investors should not count on short sales as a reliable source of income.
Real Estate Short Sale Process
The real estate short sale process for sellers begins when they have opted to pursue a short sale rather than a foreclosure. At this point in time, they may have already received several offers from investors. The real estate short sale process for buyers commences when they are able to strike a deal with the homeowners. Investors should note that the homeowners are required to pay a tax on the debt, so low offers may not be accepted.
Next, the deal is submitted to the original lender, usually a bank, to wait for approval and closing. Investors should be mentally prepared to wait from anywhere between three and 12 months, which requires patience. Finally, once the bank approves the short sale with their appraisal on the property value, the investor will be allowed to get the home inspected before receiving a final approval.
How To Find Short Sale Real Estate Listings In Your Market
A great way for investors to find short sale real estate listings is to actually look for properties that are facing foreclosure. Chances are, if a property is listed for foreclosure, the homeowners will be willing to consider a short sale deal. To find short sale real estate listings in your market, consider searching through the following resources:
- Real estate agents
- The MLS
- Real estate signage
- Bank websites
- Auction house websites
- Internet foreclosure companies
Real estate short sales can be complicated, and the process should not be taken lightly. Most importantly, investors should realize that short sale deals are a different animal from other types of investment properties because the homeowner’s emotions will be at play. Unfortunately, short sale opportunities come about because of a homeowner’s personal circumstances. However, when a short sale deal is successful, investors can gain significant returns while knowing that they may have aided homeowners in avoiding foreclosure.
Have you had any success with real estate short sales? We’d love to hear about it. Share in the comments below.
