Short Sales: The Good, the Bad, and the Ugly
Is all this positive real estate news actually good for investors? Prices are going up, houses are selling faster, and foreclosures are becoming harder to buy. Less distressed housing inventory brings the next challenge for real estate investors–finding and buying cheap houses.
One source of distressed housing appears to remain strong, and that is short sales. The challenge is that short sales can sometimes turn bad and other times, they’re just plain ugly to deal with.
A short sale is a property sale where the proceeds from the sale do not meet the payoff of the existing mortgages, hence the name “short sale.” A mortgage lender may approve a short sale assuming the borrower has a legitimate hardship and owes more then the house is worth. They may also seek a deficiency judgment against the borrower following a short sale.
When the bank doesn’t approve your short sale offer, it’s downright ugly.
First, the Good News with Short Sales…
It can be positive that they can short sales several months to process, get approved and closed. With prices going up and appreciation setting in, the short sale upside could be that houses put under contract today could be worth more when finally approved in several months.
It’s also likely that other investors are not pursuing short sales for this same reason. If you put a short sale under contract just be certain that it meets your investment criteria and you do not exceed your max offer for today’s value.
Now, the Bad
So what could be the bad side of investing in short sales? It’s the amount of work it takes to get them approved. I have personally processed entire short sales from start to finish, and it’s shocking how much work it is and how much documentation can be required to get an approval.
In today’s market, I recommend you work with a Realtor and let them enjoy working the short sale process to earn a commission. They work hard for their commission and deserve it for enduring the short sale process working between the bank, the seller, and the trying to keep the buyer focused on “hanging in there” until they get approval.
Tedious Documentation
Here are three documentation components that factor into getting short sales approved.
1. Offer – A buyer will make an offer to buy a short sale typically using a standard MLS contract prepared by a Realtor. Both the buyer and seller (homeowner) will sign and ratify the contract. The listing agent will forward the ratified contract and pre-approval or proof of funds, along with an earnest money deposit to the mortgage company.
2. Short sale package – A detailed financial package is required from the borrower. This typically includes financial statements, documentation of the hardship and other financial information required by the mortgage company. Short sales have become highly regulated, and fraud is carefully monitored in short sale packages.
3. Short sale process – The mortgage company will review the offer and the borrower’s financial package to confirm eligibility. Once that is approved, the bank will verify buyer information and work toward determining property value, then either approve or reject the short sale offer.
More Bad…
Short sales are “as is” sales, so the houses are sold “as is.” Inspections are for informational purposes only. Short sales are heavily regulated now, which means that it’s very difficult to legally wholesale. The last few short sales I’ve purchased required my signature committing not to resell the property for at least 30 days. That kills the ability to wholesale the short sale.
This Could Get Ugly
The “ugly” involved with short sales is the extreme frustration of enduring the process only to find out that the bank will not approve the offer. The entire process is bureaucratic in nature with bankers, loss mitigation departments, lawyers, and the government regulating the entire process.
The short sale process is long and painful, but it’s downright ugly when an investor waits months to buy a house then gets the news that the bank “will not accept the short sale offer received.”
All that work and all that planning can be lost months after the process started, and that’s just plain ugly. When a short sale offer is not approved, everyone involved loses in the end.
What has your experience with short sales been? Are they good, bad, or ugly for you? What is the longest you’ve waited for a short sale approval?
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My experience: one day you talk with one person at the mortgage company and they tell you “everything moving ahead” – next day you talk with a different person at the mortgage company “this short sale was disallowed I don’t know why you continue to call” Number One Rule of short sale – Call at least three times a week and Document Every Single Phone Call. My opinion is YOU are the ONLY one pushing the short sale through the goal. NObody at the mortgage company is invested in seeing a short sale to completion. That said – after four months of brutal bureaucracy the short sale went through. Kind of like building an addition – the process will test your patience – the end result is – win.
So true!
Thanks for sharing!!!
Jim
This is a very interesting, informative, and well written article, Jim.
Thanks Rick – Have you tried short sales?
They can be highly frustrating but I close don one a month or so ago and have a couple more under contract. You never know if they will get approved or not.
One buying strategy for investors could be to work with the Realtors who get short sale listings and ask them to contact you if they get an approval, but the buyer walks because it took too long.
Jim
Great post!
Thanks Jessica!
Much appreciated.
Have you tried a short sale?
Jim
Jim I’m new to the RE investing but your information was just what I needed to know THANKS!
The biggest blow to me has been mention. Like waiting for months to only find out that they will not accept your offer and talking to too many people just to get one answer.
As an investor, doing the negotiations myself is a flat out No No! Not in that game anymore.
I managed to get one approval to closing just before the real estate bubble burst. I made a nice profit but realized the short sale game was changing by the minute and it was hard to keep up and harder to get approvals. Not to mention the profits where getting smaller and smaller with the new rules in play.
I figured I should probably start working the Luxury homes since it requires the same amount of work with a Bigger Pay Days.
My main objective is to work with realtor’s who have the listings and who know potential buyer’s and leave the negotiating to someone else.
Hi Jim,
Great Article! My longest short sale was 11.5 mo’s from start to close and it was a genuine pain in the @$$* BUT well worth the wait. ($285K clear profit!) Aside from the often tedious paperwork (which isn’t as bad as it really seems) and the numerous calls (continuous follow up & keeping track of who the bank negotiator of the week is [lol] is where the real work is if you ask me.)
I would still take all the short sales I could get my hands on any day of the week because mostly #1- Nobody else really likes doing them (more for me– Yayy!) and # 2- Our arena is simply and purely a numbers “game” so naturally it makes tons of sense to me to rack em & stack em when and where I can (a pipe-line of em if you will.)
# 3 is we are all Blessed with the ability of outsourcing a majority of the tedious time expenditures (and these days for a fraction of the cost- if need be) and if you are actually someone who has certain systematic procedures in place, it will dramatically minimize the “drama” that typical ss’s can cause and actually even earn us a great deal more money in the process if you know how to massively enhance the capitalization potential within ss’s .
There are good, bad and ugly aspects in nearly every life/professional pursuit, but to me, I believe it’s such a critical part of my journey to learn, advance and grow through them all in anticipation of attaining all I desire for myself, my family and everyone I am connected to… which brings me back around to this being a numbers game… the more, the merrier for us all. 🙂
Hi Jim what about a cash sale from owner what should I at & say I buy it & am told it has to be moved & does it have to be inspected by county Its on 1.8 acres what to do?