Looking for big profits in short sales? An internet search for the phrase “investing in short sales” brings up hundreds of thousands of hits, many of which offer strategies and tricks to make a killing on the rising number of short sales in the U.S. These properties are sometimes viewed as easy money because the seller is in distress. But this is not necessarily the case.
The concept behind a short sale is this: a homeowner is unable to continue making mortgage payments; however, the outstanding mortgage on the property is higher than the market value of the house (i.e. “upside-down”). The homeowner makes a deal with the lender to sell the property at market value, and the lender eats the loss.
But are short sales really the money-making scheme that many believe them to be?
Not that it’s impossible to get good deals—many investors manage to buy short sales at a discount—but investors should be aware that negotiating short sales is no walk in the park.
“Our biggest challenge [with short sales] is getting the banks to recognize that the property is not worth what they think it is. When we submit offers, and we think it’s a fair offer, and we fight with the banks on behalf of...the buyer, it’s very difficult to get them to meet us halfway at times,” Mia Lutz, president of Say No To The Bank, a community counseling organization that works with foreclosure buyers and sellers, said.
Time frame can also be a major impediment for investors looking to purchase short sale properties. Short sales can take anywhere from 30 days to six months from contract to closing, and the deal can fall at apart any time.
It can be difficult to negotiate the price of home lower than the bank's BPO
The poor state of the housing market is a boon to investors looking to purchase short sales, since many banks are getting overloaded with properties that homeowners can no longer afford. With a surplus of homes and a lack of buyers, banks may become more receptive to investors’ discounted prices.
“They’re getting a lot more flexible,” Lutz said. “They’re going 95 percent based on the appraised value. If the house is worth $200,000, then they’ll probably deduct $10,000 from that amount and start working from there. They generally are accepting between...75 to 80 percent from that amount. That’s based on appraised value.”
Even so, banks will only budge so far. The bank gets a broker’s price opinion (BPO) on the property and, though it’s not impossible, it can be very difficult to get them to go lower than that amount, according to Lutz.
“If I’m working with a buyer that’s looking at a short sale property, I want to make sure that buyer doesn’t have the idea that they’re going to make an offer that’s 50 percent below market value—because they’ve heard that on late-night TV or at some investor seminar—and think that they’re going to be able to buy the property like that,” Dan Forbes, a licensed broker-associate, certified residential specialist and leader of the Forbes Advantage Team at RE/MAX Gulfstream Realty’s Lakewood Ranch office in Bradenton, FL, said. “Because they’re probably wasting their time and they’re wasting my time.”
Many investors go into short sales believing that they’ll be able to get 50 or 60 cents on the dollar from the appraised value, but that simply is not the case, according to Lutz. Banks are not giving properties away.
“It takes a lot of patience and negotiating with many people to make [short sales] happen,” Alexis McGee, president of Foreclosures.com, said. “[Short sales are] long drawn out deals, with less than 10 percent of the lenders approving the short sale at my...discounts.” She said she does not recommend short sales as a primary investment option because the profits are lower than with other foreclosures, she said.
However, short sales do have one or two advantages over other types of foreclosures. “[Short sales purchases are] completely free and clear of any liens,” Forbes said. “When you purchase a foreclosure property on the courthouse steps, if you don’t do your due diligence...you could actually purchase a property that does have liens and that could be of further cost to you.”
Should investors give up on short sales all together? No. There are definitely deals to be had for those with the patience and negotiation skills to pursue them. But investors need to be aware that buying short sale properties requires a lot of time and effort that doesn’t always pay off in the end.
Short sales ought to be “a rarely-used ‘tool’...in your real estate investment ‘tool box,’ not a focal point for your investment program,” according to John T. Reed’s website. Investors would be wise to incorporate other investment strategies into their plans, keeping short sales as an option when opportunities present themselves, rather than concentrating most of their time and energy on short sales. For more information on short sale negotiations, see our article Short Sale Negotiating Tactics.