Short sales are promoted as a way for investors to profit from the dismal real estate market.
These sales allow buyers to buy distressed properties before foreclosure by making a purchase offer at or below the homeowner’s mortgage balance. If the buyer and seller agree on a price, the buyer presents that offer to the lender, which can accept it or make a counteroffer.
In a completed transaction, the buyer gets the property for a bargain price, the seller avoids foreclosure, and the bank unloads a non-performing loan for a presumably modest loss.
Sounds great, but are they viable transactions for your clients?
‘Less of Two Evils’
Chip Cummings is CEO of Northwind International Corporation in Grand Rapids, Mich. and author of “Cashing in on Pre-foreclosures and Short Sales: A Real Estate Investor's Guide to Making a Fortune Even in a Down Market” (Wiley; 2009). He stresses two key points for prospective short-sale investors: preparation and patience.
Short-sale buyers need to convince the lender that the short sale is the “lesser of two evils” in comparison to foreclosure; making that case requires different preparation than traditional purchases.
For example, Cummings advises that buyers provide documentation on the seller’s financial hardship. Patience is required because the negotiation and approval process averages six to nine months, but he has seen deals that took 26 months to close.
Sold ‘As Is’
Christopher Van Slyke, CFP, a partner with multi-family office Trovena LLC in San Diego, says more of his clients have been asking about distressed property investments over the past few years.
Van Slyke is also considering short-sale investments for himself and consequently has spent significant time learning about the process.
He cautions that short-sale properties are sold “as is” so the seller is not required to disclose problems with the property.
Additionally, he says, prospective buyers need to realize that investing through short sales differs from traditional investing.
“This is not like a portfolio that generates returns on its own,” he says. “This falls into the category of being a landlord or buying and rehabbing property. They’re going to have to put their own labor into this thing, and that’s a different proposition than having your pension managed for you and living off the income.”
Prospective investors also should consider the seller’s motivation before making an offer, says Bill Lublin, CEO of Century 21 Advantage Gold in Philadelphia and former chair of the National Association of Realtors Short-Sale Workgroup.
“If the sale is a short-sale because the values in the area have gone down below the amount of the current first mortgage, that may not be the best choice for an investor,” he says.
“If the property is a short-sale because there were additional equity loans that were taken, then it’s a maybe,” Lublin explains. “And if it’s a short-sale because they (the sellers) got under water because they lost their job and it really wasn’t an issue of the value of the property as much as it was the growth of the debt, then that might be viable.”