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.
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.
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.
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?
Leave me your comments below and share this with your friends on Facebook, Twitter, Linkedin, and Google+.