Put simply, a short sale is a sale where the owner is underwater on their mortgage. This happens when the market value of the home is less than the amount owed to the lender. In this circumstance, a lender can decide to take a payment “short” of what is owed, hence the name short sale. You may hear negative equity and immediately jump to the conclusion that it will be a good investment, but this is not always the case. Sure, you may be able to pay less for the property, but there is a lot that goes into getting a short sale offer approved.
Buying a short sale property will take a strong knowledge of the process of how lenders appraise a property and how they decide if they will accept a short sale offer.
Lenders use many avenues to asses the value of a property, and they use several factors to determine if they will accept a short sale offer. To appraise the value, lenders use:
- A Broker’s Price Opinion (BPO) looks at comparable sales, current comparable listings and market conditions to determine the market value.
- An appraisal may be conducted by an appraisal company.
- Many lenders have internal departments that determine the market value.
The Waiting Game
One of the main drawbacks to a short sale is the waiting game. It can take months to get a short sale approval from the lender. Lenders also have very specific criteria of what they will accept for a short sale, and so you may put in months of work, only to have the lender deny the offer. This is where you have to ask yourself, “Is it worth the wait?” In short sales, patience is definitely a virtue.
Risk vs. Reward
There are many risks you take with short sales. As discussed above, it can be a lot of work, only to end in a denial by the lender. Also, if it is a good deal, there may be multiple offers, and it will take a well-structured offer to have yours accepted by the lender. To complicate things, the homeowner, not just the lender, must also accept the offer.
Short sales are “as is” properties, which in real estate investing isn’t a deal breaker, but making sure you do your due diligence making sure there are no significant flaws that can add up to a hefty repair cost is imperative.
Paying Off Junior Liens
In the current market, if you are going to deal with short sales at all, I recommend sticking to transactions that fit within the Paying Off Junior Liens (PJL) strategy that I teach. I do not recommend specifically marketing to buyers in a short sale situation, but it is essential to be able to identify a PJL deal if you see it. A ‘junior’ lien is when someone has a second mortgage or loan on a property. If there is equity in the first mortgage, you can then attempt a short sale on the second mortgage (or ‘junior lien’), reinstate the original loan and take over the payments. This is just an elementary explanation of this strategy, and more in-depth information on how you can invest in real estate with no money and no credit are explained in my courses.