A short sale is a good opportunity for real estate investors and homebuyers to get a good deal on a property. However, buying short sold property is not the same as the other regular real estate transactions. We spoke with industry experts who shared tips to help you make buying discounted properties easy.
Below are the top 26 buying tips, straight from the pros:
1. Have a Longer Timetable
Marco Santarelli, Owner, Norada Real Estate Investments
The approval process is different with a short sale. The seller must first approve your offer and then it must be sent to the lender for review and approval. You’ll need to be patient and have a longer timetable. Banks take their time approving a short sale, and it can be several weeks or months before you have a final approval.
2. Build a Pipeline & Make Multiple Offers
Ben Mizes, CEO, Clever Real Estate
The best way to buy a short sale is to build a pipeline and try to buy multiple short sales. Even if you get a homeowner to accept your price, the bank still has to agree. In many cases, they will send a counteroffer that’s higher than you’re willing to pay. The entire process can take months, so it’s a good idea to have multiple irons in the fire. After all, if you’re flipping houses, you only need to buy a few short sales per year at the right price to generate a large amount of income.
3. Work with an Experienced Advisor
Sacha Ferrandi, CEO, Source Capital Funding, Inc.
While a lot of information may be available online, it is important to have a trusted professional on your side when purchasing a short sale home to guarantee all information is thorough and accurate. Since many properties being sold in short sale may have a variety of liens — such as homeowners association liens, mechanics liens, and first and second mortgages — the purchase will be more complicated. Having an experienced professional on your team will make purchasing a home in a short sale a less stressful experience.
4. Be Careful When Buying Condos & Townhomes
Gary Lucido, President, Lucid Realty, Inc.
The biggest risk in buying short sales is when you buy condominium or townhomes, because there could be unpaid assessments that the bank is going to stick you with — and you won’t find out about it until the last minute. Try to find out early in the process whether or not there are any unpaid dues, so you are ready.
5. Be Prepared to Close on Short Notice
Ralph DiBugnara, President, Home Qualified
When it comes to short sales, the majority of problems will surface based around time frame. With short sales, you will first make an offer and, because in most cases it will be for less than market price, it will then have to be approved by whomever owns the property, which is usually a bank or an investor. Once the terms are approved, they will give you a specific time frame to close on the purchase. This means that you need to be ready with a bank commitment to lend you money for the deal. In a lot of cases, that bank will have to move fast to get it closed for you and meet the parameters of the contract.
6. Understand the Difference Between Short Sale & Pre-Foreclosure Properties
Doug Willis, Broker, Up2DateRealEstate.com
There is a distinction between short sales and pre-foreclosures, which are listed on many real estate websites. A pre-foreclosure has a default notice filed against it, but it may never come on the market and be listed for sale. A short sale occurs when a seller has to sell the house for an amount that is less than the balance they owe to the bank, making it short. However, many banks now require the property to be listed for sale for a certain period of time, which will almost ensure it sells close to market price.
7. Know the Difference Between Approved & Unapproved Short Sale
Earl White, Co-Founder, House Heroes LLC
An approved short sale means the bank has already approved the sale at the list price. Approved short sales close at a normal pace if you offer the list price. However, many short sales on the MLS are unapproved — this means that the current owner set the list price without the bank’s consent and intends to present the buyer’s offer to the bank for a decision. Unapproved short sales frequently never close for the simple reason that the bank is unwilling to accept a loss. Even if the bank does ultimately approve the price, expect to wait months for the final decision.
8. Be Patient When Buying a Short Sale
Mike Hills, Associate Broker, Atlas Real Estate Group
It’s important to be patient when buying a short sale. Banks can be slow; understand that most bankers don’t know as much about real estate as you think they do. Be strong in your offer and be patient once you put your offer out. A lot of times you’re dealing with homeowners who are in dire financial situations. They may even still be living in the home while these negotiations are progressing, so celebrate your success but don’t gloat.
9. Understand Adverse Selection
Bruce Ailion, Broker & Attorney, The Ailion Team
With adversely selected inventory, the value of the property has declined below the loan balance and perhaps market value when compared to homes that are not adversely selected. The property may be in need of substantial and expensive repairs, may sit on an inferior lot, and may be impacted by negative externalities or neighbors. Buyers of short sales and REOs believe they are getting a great deal — that’s often what motivates them to search the short sale and REO category. This may or may not be true. Many buyers miscalculate the cost of repairs or the impact of poor design and negative externalities, which can be costly.
10. Don’t Get Your Hopes Up
Anthony S. Park, Attorney, Anthony S. Park PLLC
Don’t fall in love with a deal too early. Many short sales fall through, meaning the bank won’t approve the deal without explanation. So even if the seller accepts your offer, don’t get your hopes up too high until the bank also accepts your deal.
11. Make Acceptable Offers to Lenders
John Hayter, Partner, Ranch Marketing Associates
Short sales involve three parties: the seller, the buyer, and the bank or lender. Getting the seller to accept an offer is only the first step in negotiation. When making an offer, a buyer should really be making the offer with the lender in mind, as the lender will have the final say as to whether the offer is acceptable or not. It’s best to be prepared for a lot of back and forth during the entire process.
12. Don’t Be Afraid to Be Aggressive
Ryan Burns, Co-Founder, Texas Hard Money
Short sales in real estate are often the result of a homeowner being in a challenging financial situation, where they need to sell quickly and sometimes even below market value. If you are in the position to make an offer immediately, take advantage of the owner’s need to sell swiftly by further negotiating the offer price to something lower. The seller may be willing to sacrifice some of the home’s value in order to expedite the sale.
13. Expect to Deal with Multiple Departments at Banks
Tony Sargent, Broker, Compass
When buying a short sale, expect to deal with multiple departments at the bank, and for the deal to take longer to close than usual. Try to get as much information as you can when it comes to the outstanding loan, and find out what the bank is ultimately going to take. The bank will need to approve your purchase, so make sure you are always clearly communicating with them.
14. Compile Information & Have a Long-Term Outlook
Carla Bozeman, Real Estate Expert & Member, Hilton Head MLS
Find out what liens are on the house from your town hall. Make sure sellers go through these liens and fill out a package of hardship to make sure they are qualified for short sale. Set up communication with each bank and be prepared to contact the bank often. Put the house up for sale and make sure your prospective buyers and realtors know that this is a long process. Be prepared to negotiate with the bank, as they are taking a loss and will try to get as much money as possible. It’s important to make sure the listing agent knows how much time a short sale takes, as banks are often hard to get in touch with. Short sales take patience and persistence.
15. Never Pay the Seller Outside of Closing
Philip Taylor, Owner, PT Money, LLC
Paying the seller outside of closing is illegal. It can also set you up for additional tax liabilities. You have to remember that in a short sale, the lender takes over the role of the seller. This means that the lender will be the one to approve your offer. If you are confused about the process, it’s best to work with a trusted real estate agent to avoid getting scammed or cheated.
16. Know Where to Find Properties
Sharon M. Lewonski, Partner, Culhane Meadows PLLC
Online databases, courthouse listings, and legal ads are typical ways to find attractive short sale opportunities. Serious investors, however, should work with a local real estate agent or attorney who has connections within the loss mitigation department of community banks or institutional lenders. Some of the best opportunities are never formally advertised but accessed only through specialized databases. They may, in fact, involve loans on a loan officer’s watch list — loans that are not yet in default or transferred to the foreclosure department.
17. Gather Information to Negotiate on Price
Chris Ragland, Chief Operating Officer, Noble Capital
Know both the amount of the loan and the current market value of the home. This may allow you to negotiate with the lender for a more favorable payoff amount. Conduct an inspection of the property and know exactly what you’re getting into. You need to be absolutely certain you understand what condition the home is in so you can ensure your budget for renovation is realistic and can add value to the home.
18. Be Empathetic When Dealing with Short Sale Homeowners
Derik Keith, Owner, Metro Cash Offer
Prospective short sale investors should always remember that the homeowners are not a number. So don’t view them as a number. You are here to help these folks work through a real estate-related problem. Listen to what they have to say, be honest, and guide them down the right path — even if it’s not the one that makes you money.
19. Study the Entire Short Sale Process
Derik Keith, Co-Owner & Real Estate Agent, Keith Home Team Metro Brokers
It’s important to work with a professional who has experience with short sale transactions — especially if you are new to short sale. However, if you choose to go at it alone, then make sure you study up on the entire process so you avoid costly mistakes. Many times, the buyer will be required to put down a non-refundable deposit or even pay a buyer’s premium if the short sale does get approved. This is one of the things you should be aware of before you get into a contract.
20. Do Proper Due Diligence
Katie Messenger, Director of Sales, Bello Dimora Real Estate Network
Buyers who aren’t real estate investors need to be thorough and complete their due diligence. Chances are, if a homeowner is struggling to pay the mortgage, they haven’t paid for maintenance issues either. It is encouraged that buyers have a professional home inspection completed, are aware of what is currently a problem, and what is getting close to becoming a problem if not resolved. Also, it’s best to check the documents thoroughly for possible liens and technical errors.
There are times that the repairs will cost more than you expected. In cases such as this, you can walk away from the deal. Angie’s List recommends adding an escape clause in your contract offer to protect your earnest money. Adding contingencies in your contract offer, which state that the agreement isn’t valid unless all lien holders agree to the reduced price or if you can’t get a loan, will help protect your interest as a buyer.
According to SouthStar Communities, the bank is typically unaware of the pricing during a short sale. If you make a very low offer for the property, there is a high chance that this offer will be rejected without even giving you a feedback. In fact, even buyers with good offers wait some time to hear back from the lenders, so those who make offers that are too low can expect even more of a waiting period.
According to SF Gate, once the lender approves your offer, you can no longer request a credit or price reduction to make repairs based on the results of your property inspection. Most lenders will ignore such requests in a short sale; they are no longer obligated to go through with the deal with you and can accept an offer from another interested buyer.
Redfin suggests that you keep searching for other properties even after you make an offer for the one on short sale. This is because a short sale approval process can usually take several months before you get an answer from the lender. It’s best to keep your options open and continue to explore other available properties, especially if you need to move in to your new home soon.
Zacks recommends that short sale buyers process and settle their financing beforehand. It’s important to maintain good credit so you won’t encounter too many problems when applying for a home loan later on. Also, make sure that your documentary requirements are in place and readily available anytime you need them.
According to HouseLogic, it’s important to do your research and find out the property’s fair market value if you want your offer to be acceptable to the lenders. In a short sale, lenders are usually consenting to lose money on the loan they made to the sellers, and they want these losses to be as low as possible.
Buying short-sold property is a challenging process, but it can also be rewarding — especially if you are able to find a great deal. There are things you need to know before you get excited about making your first purchase. If you plan on buying discounted real estate, make sure to use the above expert tips as a guide.