Many of my investor-clients are currently enjoying the many benefits of short-sale investing.  In the current season of loan delinquencies, this type of investing will likely become a very formidable avenue to acquire equity-rich properties for qualified investors. 

The following is a brief Q&A on short-sale investing:

What is a short-sale and why should I buy properties on a short-sale?

A short-sale occurs when a mortgage lender allows a homeowner to sell a property for an amount that will net the mortgage lender less than what is owed on the mortgage.  This can occur in several situations including when the property values in an area have declined, when a home is in need of extensive repair, or when the homeowner is behind in payments, to name a few.  Purchasing a property on a short-sale can often lead to your owning a property with built-in equity on the closing date. 

What types of discounts can be expected on a short-sale?

Discounts vary from lender to lender and case to case.  In most cases 10% below market value is not an unreasonable expectation for a home in good shape.  Placing an offer below this, may often lead to a rejection of offer, or the lender may be very slow to respond because they are focusing on more formidable offers on other properties.  If the property is in need of extensive repair, deeper discounts can be expected, but in these cases, you will have to make repairs on your own dollar, as repair credits and seller-paid closing costs are generally not accepted by lenders on a short-sale.

How does a short-sale transaction differ from a traditional purchase transaction?

A short-sale differs from a traditional sale in several ways:

1.  It is usually an as-is sale.  This does not mean you can not get inspections done. Inspections are always recommended.  The seller, however, will likely not be in a financial position to help with repairs (especially if they are behind in mortgage payments).  In addition, the lender will not allow for repair credits.  Often their stance is that you are purchasing a property at a below-market price, so it is up to you to handle repairs and closing costs.  In the case that your offer is rejected, you will not get a refund of your inspection costs.

2. The final price, terms, and closing date are at the sole discretion of the lender.  The seller of the property may accept your offer, but the seller's lender(s) must approve it for the sale to close.

3.  It may take several weeks (or longer) to get a response from the lender on your offer, especially if it is far from the lender's payoff expectation.  I've personally worked on files that took anywhere from 1 week to 9 months to get a response.  At present, lenders are swamped with short-sale offers and are focusing their attention on the most reasonable offers.  Serious buyers have threfore learned that unnecessarily low-balling their offer will usually end in a rejection.  It is in the lender's best interest to expedite the most formidable offers and the offers that appear to have the best chance to reach the closing table.  Remember, their decision is not an emotional one; it is strictly based on the numbers.  Placing a well-thought-out offer is therefore very important.  I've noticed a trend for lenders to reject low-ball offers and take the home to foreclosure sale with the expectation of reselling it, especially if the property is in decent shape and can be put back on the market rather easily.  When placing an offer on a short-sale, look for a win-win situation; one that puts you in position with equity in place at closing, but that also appeals to the powers-that-be at the bank holding the underlying mortgage.  Remember, getting too greedy in your offer can often lead you to miss out altogether on an otherwise formidable investment.

Is there any additional risk?

Aside from the potential loss of inspection and due-diligence dollars, there is the risk that the lender will come back with an acceptance of an offer that must close in a short period of time (sometimes 1-2 weeks).  This is why it is critical that you have your financing lined up with everything on your end approved, and the final items required for closing being only the appraisal and title search.  If these are the only 2 outstanding items, closing in such a short timeframe is not out-of-reach.

What do you mean by "qualified investors" in your statement above?

Qualified investors are cash buyers or are fully preapproved for loan financing with a solid loan program (in the current lending climate, this means no 100% investor loans, stated income loans, etc...) Down-payment funds should be set aside and the investor should be ready to close quickly once the offer approval is received from the lender.

Can you offer a few examples of short-sale purchases that your clients have made?


Example #1   My client purchased a 3 year old single-family home in a great neighborhood for 143k.  the property was in need of only minor repair items that the buyer could fix himself(primarily maintenance items) and appraised for 161k by his mortgage lender.  The property was occupied at closing for $1200/month in rent which provided cashflow from day 1 and a relatively new property in an area that had appreciated very well in the preceeding 3 years.

Example #2  Single-family home purchased in an established neighborhood for 53k.  The home needed approx 20k in repairs and appraised for 112k after renovations.  the home was resold at full asking price within 3 months of purchase and repair.

Example#3  Single-family home valued at approx 365k was purchased for 285k.  The area, although very upscale was very slow-selling, so the home was rented for approx 1 year and later put on the market.  Repairs/updates totaling approx. 10k were completed after tenants moved out.

Example #4  Single-family home purchased for 55k and needed a complete overhaul to the tune of approx 35k.  The home was put back on the market and sold for 155k.

As you can see, short-sales offer a solid opportunity for equity for qualified investors (both landlords and rehabbers).  This mechanism is particularly beneficial for landlords, who want to buy-and-hold the property for cashflow and borrow from the equity in the property for future purchases.  If, after this reading, short-sales interest you, feel free to subscribe to my Raleigh-Durham Investment Alerts below to be placed on my Insider's List for Short-Sale opportunities.


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Tiffany Elder - Broker, Realtor

6409 Fayetteville Rd. Suite 120-367
Durham, NC 27713