Short sale homes: Are they a good investment option?

Property Management Blog

Short Sales homes are considered an opportunity, as these houses are available at a low price. When owners want to avoid foreclosure, they choose short sales, also known as distressed sales. Short sales homes are not simple deals, and more risk is associated with them. However, if you plan properly and do everything right, it can bring good profits for you. Here we discuss the basics of short sale homes, the pros and cons associated with these investments, and how you can find these properties.

What is a short sale?

When a homeowner is in a difficult financial situation, they choose short sales. When they can't manage their finances, they decide to sell the property at a price lower than the mortgage. Lenders agree to forgive the remaining balance in such situations. This is an alternative to foreclosure and homeowners prefer it, although it is not an ideal bargain for the lender. But it is a safe way to get rid of difficult financial situations. 

This is a profitable deal for the buyer; however, buying short-sale homes is not always the best deal. It is not similar to buying a property at a foreclosure auction. 

Difference between short sale and foreclosure

These are often used interchangeably, and people usually confuse them. The situation can be the same, as the property owner finds it difficult to pay the mortgage of property. However, these are not easy ways to avoid mortgage obligations. 

Short Sale: When the homeowner's debt increases on the mortgage balance than the property's market value, it can be a short sale situation if he chooses to sell their property. The homeowner convinces the lender to accept a lesser amount instead of the total amount there is supposed to pay. During this process, the buyer will deal with the seller directly, but the lender will be part of the process, and they will approve and review all the details of the deal. If the buyer and seller confirm the deal, it can't be closed until the lender agrees to the terms and conditions.

Foreclosure: In case of a foreclosure, banks or lending agencies take ownership of the house if the owner fails to pay the mortgage. After that, the lender starts the selling process to recover the loan money. The lender evicts owners before starting the process. So, foreclosure takes less time than short sales because the lender is the owner of the property and wants to close the deal as soon as possible. 

Why are short sales preferred?

There are two reasons to prefer short sales over foreclosure. 

  • Foreclosure is forced while short sales are voluntary. 

  • After foreclosure, the homeowner has to wait for seven years before applying for another mortgage loan. But in case of short sales, the owner has to wait for two years only. 

Lenders prefer short sales because they can take back the original loan without wasting time on lengthy legal processes. 

Alternative to buying short sale homes

If you don't have money to buy a property and fail to qualify for the loan, there are other methods you can choose and be a property owner. For instance, subject to real estate. When a homeowner can’t pay the mortgage, you can pay their mortgage and purchase the house. Buyer and seller don't make it official with the lending agency. Sellers agree to this kind of deal as they want a solution to the problem. Due to this deal, they will not be responsible for the mortgage payments, and they have the chance to improve their credit scores. They can save on foreclosure and don't have to pay the closing costs. 

How does a short sale work?

The process of short sales is similar to the traditional real estate deal. But the lender is involved in this kind of deal, which makes it very complicated. Short sale work follows these few steps. 

Identification: you have to identify short-sale properties. For this, check courthouse listings and online listings. Know the house's market value and what you have to pay if you buy it as a short sale. Try to find a house with high market value. If the owner's equity is high, don't go for this deal because the lender will prefer foreclosure in this case. 

Property inspection: to determine the property's condition, you need to inspect it first. It will help you evaluate how much repair and renovation is required for a good return. 

Research: The next step is to find the profit potential of this property. You can analyze nearby properties in similar conditions for this purpose. Different online tools and software can also help you to analyze. 

Get information about liens and mortgages: get information about the liens on short sale homes and who is the lien holder. Confirm the information they provide and make sure there are no undisclosed liens on the house. 

Arrange finances: After that, you have to arrange your finances and how you will pay for this short sale home. If you have a good credit history, the lender you are currently dealing with will be ready to approve your loan. 

Reach out to the lender: contacting the decision-maker can be the biggest challenge. Contact the resource recovery department of the lending agency. You have to provide an authorization letter from the homeowner to discuss the mortgage situation. 

Complete the application: Usually, lenders have an application format for short sale requests. Fill out the application with all the required documents. If there is no such application format, find out the required paperwork and complete it accordingly. 

Create a proposal: Short sale proposal consists of various documents like an application form, authorization letter, purchase and sale contract, statement of property value, description of cost and liabilities, and settlement statement. 

Close the deal: You have to negotiate the deal, as the lender can come up with a counteroffer. When you reach an agreement, write everything and close the deal. 

If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty.

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