What Investors Need to Know About Short Sale Properties

Short sales are very popular with investors because they represent an opportunity to buy a home at less than market value. However, before stepping into the quicksand, there …

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Short sales are very popular with investors because they represent an opportunity to buy a home at less than market value. However, before stepping into the quicksand, there are a few things investors should be aware of. 

You may be riding on the Titanic, so diversify

Short sales are a slow process. We have seen competitive cash offers made six months ago that still have not been accepted by the bank. If you are making offers on only one or two homes, be careful that you don’t tie up all available cash on a short sale that may stagnate for three to six months as you watch other great cash deals sail by.
 
It is best to make offers on short sale properties when you are purchasing in volume, and the short sale opportunity is just one of many irons in the fire. When you are buying multiple properties, you can afford to make lowball offers on slow-moving short sales.
It is important to realize that most short sale offers fail to go through. Many deals fall apart before they can close, or the offers just are not accepted. Even if the bank accepts the offer, there are many other stumbling blocks along the way that can cause the deal to falter.
For example, after accepting an offer, many banks and cash-distressed sellers will refuse to pay traditional seller costs, such as termite inspections, estimates and closing costs. Banks realize that you want the property after sinking significant money and time resources into the deal, so they are refusing to budge on added costs that increase their losses on a property. The accepted offer often is not the true end cost of purchasing the short sale property.
Be prepared for extra out-of-pocket costs
A smart investor will walk into a short sale deal prepared to spend several thousand dollars more covering these types of costs. Other potential expenses may include past-due HOA (Home Owner Association) dues or title liens. 
The appraisal may cause another major issue if the property is in an area where home values are declining. As the value drops, and the deal drags on, the home value may drop below the offer, which would then be reflected in the appraisal. The banks are sticklers for wanting to keep the initial offer, so the investor will have to decide to either take it at above the current value, or walk away from the deal. Unfortunately, this can happen many, many months into the short sale deal and cause it to fail at a late stage. It is certainly a possibility that the investor should be aware of.
Cash is king
When making an offer on a short sale property, cash is absolutely king. Banks will consider a quick-closing cash offer over a more lucrative financed offer simply to get the property off of their books. They also will typically not accept a long close, so be prepared for them to insist on a 30-day close as part of the deal.
While cash offers are more likely to be accepted, it does not speed up the bank process. They are excruciatingly slow regardless of how attractive the offer is.
REOs vs. short sales
Based on our experience dealing with today’s market in the Phoenix area, we have found that many bank-owned properties (REOs) are more attractive opportunities than short sales. You can still get below-market prices, but without the lengthy time delays and unpredictability. When you make an offer on an REO, you typically find out within a week if the offer has been accepted, freeing you to close the deal or move on other opportunities. As long as your offer is a fair one – still below market but fair – it moves quickly.
The condition of REO properties can be an issue, though, because they are vacant. Arizona is just starting to prosecute people who strip properties, but this is a risk to be prepared for. Short sale homes are usually in better condition because most are still owner-occupied during the sale process.
No two investors have exactly the same situation and needs. Before making any investment, you should review your specific objectives with a qualified investment expert to make sure the investment has the potential to meet your objectives. This is especially true in real estate investing, where buying the wrong property can be catastrophic. For more information, please see the HomeLovers.com article on “How to Select a Property Management Company.

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