If you’re a novice or intermediate real estate investor, you might have heard the term short sale thrown around by more experienced investors. This article explains what a short sale is, and how you can determine if this type of investment property is right for you.
What’s a Short Sale?
If you haven’t heard the term before, a short sale occurs when a property owner owes more money on the outstanding mortgage than the property is worth. When the lender agrees to let the property sell “short” of the money owed, they take a loss as a “short sale.”
This is typically considered a better option for the seller than a foreclosure where the lender takes ownership of the property because of an unpaid mortgage.
Short sales can be appealing if you’re looking to acquire an income property at a discount. Now’s the time to consider them given how many people have been impacted by the coronavirus pandemic and the consequentially high unemployment rates.
Why Buy a Short Sale Property?
Lenders look to sell short sale properties fast. They want to avoid incurring additional costs. As such, they are likely able to offer better financing terms—like lower interest rates—to make the real estate more attractive to purchase.
Buyers usually get lower pricing that’s below market value when it comes to short sale properties. This is due in part because lenders have already agreed to a short sale that covered part of the mortgage balance.
Most short sale properties tend to need fixing up, which makes them great flip and sell properties or low-cost rentals. By making a few repairs or renovations, the buyer can add equity quickly.
Are Short Sales Good for Every Investor?
That depends. Short sales have a few drawbacks.
If you’re hoping to negotiate a leaking roof or outdated kitchen, a short sale is not for you. Almost all short sale properties sell “as is” with no negotiated inspection and repair terms. Buyers would assume all repairs or required updates upon purchase and any such costs would be factored into the discounted purchase price. And in some cases, the property’s condition is not always disclosed.
If you’re looking for a quick purchase, think again. The buying process on short sale properties is typically longer than traditional real estate transactions between the buyer and seller. With a short sale, the lender and any other lienholders are involved, which can lengthen the processing time.
Longer processing times could also have an impact on other investment opportunities. Buyers could miss out on other properties while they are focused on the pending short sale.
Where Do I Begin?
Assuming the above drawbacks didn’t scare you away yet, perhaps a short sale is perfect for you. The following tips will help you find your starting point. Before you decide to purchase a short sale property, know what you’re getting yourself into. The following can help.
Get your financing in order.
Unless you are paying cash, you’ll need to get preapproved for a mortgage. Having this prearranged will help expedite the closing once an agreement has been made.
Find a property.
Don’t spin your wheels searching through all listings. Look for those that are in pre-foreclosure. One of the best ways to get a heads up about homes that are about to go into foreclosure is by working with a real estate agent. Developing a symbiotic relationship with a real estate agent in your market is essential for professional real estate investors. Real estate is a small world, so networking and referrals can make all the difference when it comes to growing your business.
Another quick way to find short sales is through local list providers.
While these lists do cost money, they save you time since you don’t have to dig information out manually.
Do you have too many lists to manage?
Many times you’ll need to purchase multiple lists to find short sales and pre-foreclosures, among other types of investment properties. When you’re working with multiple lists, using a list stacking and filtering service is essential to help you narrow down your targeted properties. Property List Manager is one of the best systems for that on the market today. You can learn more about this affordable tool here.
If you’re just starting out and have plenty of time on your hands, check out public records and title companies where you might be able to discover homes that are available for short sales. And if you’re looking to find property owner information and the name of the lenders, you can visit the county clerk’s office who might be able to get you these details.
Do your research.
Before you make an offer, take the time to research the property. You will want to research competitive properties to find out if the short sale is one that will turn a good ROI for you. You might be able to build a relationship with a real estate agent who can do a market analysis for you on some of these properties.
Equip yourself with the right tools.
If you plan to do multiple short sale purchases, you’ll want to have the right tools and systems in place that will help you make deals faster and easier. Our REIgnyte Grow platform was built for novice and intermediate real estate investors who are wanting to grow their business. It comes with our dynamic CRM for managing every step of the customer journey, automatic instant comp reporting from three different resources, and it makes managing the inspection process easier than ever before with built in customized inspection reporting.
Right now, we’re offering an amazing Real Estate Investor Stimulus Package that comes with the entire REIgyte Grow platform AND Property List Manager at an unbelievable rate!
Inspecting the home is an important part of the short sale process as well.
You might want to call a professional home inspector who can conduct a thorough inspection of the property pointing out areas in need of repair, or at minimum do your own inspection. Our REIgnyte Grow suite has inspection report tracking included where you or your professional inspector can upload pictures, document necessary repairs, and track what’s been fixed or not.
If you come across a property that needs extensive work, you should also ask any necessary contractors to provide estimates for renovations or repairs so you can see if the costs for repairs makes sense according to the discounted short sale pricing being offered.
Lastly, conduct a title search to check for any liens or encumbrances.
These can muddy up the short sale process and eat into your revenue as well.
Doing your homework is important. Before you decide to purchase a short sale property, know what you’re getting yourself into first by following all of the research and informational tips in this article.
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