Homeowners facing foreclosure due to a financial hardship can ask their mortgage lender to approve a short sale. This means selling the property for less than what the homeowner owes on the mortgage. Short sales are a last resort option for homeowners who have no equity or owe more on the loan than their home is worth.
Although a short sale can be very profitable for an investor, it’s a lengthy, complicated process that only a skilled, experienced investor should attempt to navigate. Short sales are also unfamiliar to most sellers, so the homeowner will need guidance to successfully negotiate a short sale with the bank as well.
What to Know Before You Make an Offer
Don’t approach a short sale with a low-ball offer. The lender will order a BPO, broker price opinion, to get a fair market value on the home. If your offer isn’t within reason, the bank won’t even bother to counter it.
Don’t expect to close quickly, as short sales can drag on for months. You will need to collect many documents from the homeowner, including an authorization to release loan information, two years’ worth of tax returns, the homeowners last two bank statements and paycheck stubs, a hardship letter and a few other specific forms (follow the link at the end of this post).
This package will need to be reviewed if by each mortgage holder, which can further delay the process if a second loan exists. If the sale price of the home doesn’t cover the second loan, this lender can block the sale.
Benefits of Short Sale Investment Homes
If you don’t mind the extra time and paperwork that goes into a short sale, there are benefits to adding these properties to your investment strategy. Unlike many foreclosed homes which sit vacant and begin to downgrade from neglect, short sale homes remain occupied with utilities intact. This can mean a significant difference in repair costs.
If at all possible, work with a seller enrolled in the Federal Home Affordable Foreclosure Alternatives program, or HAFA. According to Bankrate.com, HAFA is designed to speed up the short sale process by streamlining the transactions with rules that require lenders to shorten the decision-making process.
Certified distressed property expert, Dawn Daubenmire, told Fox News Business that she closed a recent short sale after 58 days, working through the HAFA program. She knows of other experts that have been able to close in 30 days or less.
Some Sellers even market their short sales toward investors only. They don’t want to be asked to repair the home themselves and need to sell the property “as is.” This type of property appeals much more to investors than traditional home buyers.
A short sale home might also appeal to a buy and hold investor. If the property has been well maintained by the previous homeowners, the investor might be able to move in new tenants with nothing more than a new coat of paint on the walls and professional cleaning of the floors.
Communicate Clearly with Your Seller
As with any real estate transaction, it’s really important to educate the home seller and make sure they understand the short sale process. They need to know they won’t be walking away with any money or profit from the deal, otherwise the lender would never agree to it. A short sale keeps the homeowner in charge of the sale of the home instead of the bank, but it still has a negative effect on one’s credit report.
Check out this step by step short sale process by real estate expert, Josh Cantwell, a fulltime investor from Cleveland Ohio. Cantwell has experience with numerous foreclosure and short sale transactions and has been mentoring new investors since 2004.