The Pros And Cons Of Short Sales
There are hundreds of short sale deals being closed every day. What was once the most popular real estate investing niche has managed to remain relevant in recent years. While the deep discounts are not as abundant there are still many good deals to be had. Like any other real estate deal the key is to find properties where you can create value. If you can get the property at the right price it is well worth the time and effort. That being said short sales may not be for everyone. They require a good amount of work that sometimes goes for naught. However there are still diamonds in the rough if you are willing to find them.
A simple definition of a short sale is a real estate transaction where the lender allows the seller to sell for less than the current amount owed. These types of deals gained nationwide popularity soon after the mortgage collapse. As home values fell many homeowners owed more than their home was worth. From a lenders perspective taking a loss on the sale is still better than dealing with a foreclosure. Not only is a foreclosure costly but can take several months to complete. Typically the more difficult the property is to sell the deeper the discount for a short sale buyer. Here are a few pros and cons associated with short sales.
- Discounts. The most obvious reason you would pursue a short sale is for the potential discount. At the height of the short sale craze properties were going for roughly 60 cents on the dollar. The market has since stabilized and lenders do not feel the same urgency to get rid of a bad asset. That being said there are still good discounts available. In most cases the properties with the biggest issues offer the greatest discounts. Once you find a property and get the seller on board you need to present your case to the lender. The more issues you can show the better the discount.
- They Help The Seller. A short sale is one of the last options before foreclosure. A foreclosure stays on the credit report for anywhere from four to seven years. This impacts the ability to purchase a car, rent a house or apply for a credit card. A short sale still shows up on a credit report but it is far less severe than a foreclosure. Yes, you are potentially making a profit but you are also helping the homeowner out.
- The Ability To Negotiate. Working with lenders is often seen as a negative associated with short sales. However the opposite is the case. With a short sale you have the ability to partially influence their decision. By supplying a cost of repairs, comparable sales and other negative items there is a chance that they will see the value your way. Ultimately the lender will do their own due diligence but you may be able to influence their decision.
- Length Of Transaction. The biggest reason that many investors soured on short sales was with the length of every transaction. On average deals were taking 90 days to close, with some many months longer. It was not uncommon for a short sale to sit idle with a negotiator for several weeks on end. This tied up funds and restricted investors from looking at other deals. This wouldn’t be a problem if the deals ended up closing but many deals had 11th hour issues that prevented them from moving forward.
- Uncertainty. Closing a short sale requires everyone to be on the same page. It is not enough for a seller to want to sell and a buyer want to buy. You need to lender to agree to your offer. They will do their own independent valuation of the property. When this is done they may accept, counter or outright deny your offer. Even if they do accept the title needs to be cleared and any junior liens satisfied. If there is an issue in any one of these areas the deal goes back to square one.
- Paperwork. To get a short sale approved the lender underwrites the application in reverse. Instead of seeing that the homeowner has income and assets to pay their mortgage they are looking for reasons they cannot. Typically their needs to be a documented hardship that caused the late payments. The process starts with a lengthy application that includes a financial worksheet. The homeowner needs to supply bank statements, W2’s and a current paystub. With your offer you should include your supporting documentation. A cost of repairs, property damage and comparable listings to support your value. All told there are dozens of pieces of paperwork that must be submitted before the lender will do anything. If one form or document is missing the lender will not start the process. When they ask for additional items your offer may go to the bottom of the pile adding several weeks to the process.
For every investor who avoids short sales there are others who thrive off them. Like anything else you do in real estate you should form your own opinion before making a decision. Short sales are still being closed every day and in the right situation could be a real home run.