The Most Common Mistakes to Avoid When Buying a Short Sale
Are you looking to snap up a home via a short sale?
Well, the idea of buying a new home at a fraction of the price doesn’t seem possible. However, this is the reality for a number of home buyers and investors who are able to find a short sale.
If you’ve never heard of a short sale or aren’t sure what it is, then this article is for you. We’ll also discuss some of the mistakes you should avoid making when buying a short sale.
What is a Short Sale?
Simply put, a short sale is a home that’s sold for less than what the homeowner owes on it. At this point, the lender won’t get all the money it’s owed. This works out in situations where the house is in foreclosure.
The only way a home can be sold on a short sale is when the lender approves of it. Now, while this may seem like a great advantage as a home buyer, there are some expenses you must be aware of.
These typically occur after the purchase of the property. For instance, say you purchase a property, then end up paying $50K in renovations. These are considered hidden costs, especially if you were unaware of the amount of work required beforehand.
It’s essential to have a reliable inspector inspect the property to ensure there’s no major damage from termites or with the plumbing, foundation, and electrical system.
Next, let’s review some of the most common mistakes buyers make when purchasing short sale houses.
Not Reviewing Property Issues
Again, knowing what’s wrong with a property is key when you’re trying to get a “deal.” It’s not much of a bargain if you spend more than you bargained for.
There are instances where prior property owners are spiteful and damage the property. Then there are other cases where properties sit empty for years and develop plumbing and mold problems.
Whatever issues exist in a home, be sure you know about all of them before you sign on the dotted line.
On the upside, you may qualify for loan programs like Fannie Mae HomeStyle that offer assistance to home buyers that have to renovate.
Not Having a Home Inspection
It’s not enough to talk to the past owners, the realtor, or the bank. It’s also not good enough to do a walk-through of the property on your own. It’s best to have a knowledgeable expert inspect all areas of the property.
If you have to hire more than one, then do so. Everything from the plumbing and electrical to the foundation and roof requires inspecting.
There are a number of expensive problems you can run into, such as termites and structural damage. Plus, these problems can be dangerous. Do note there’s a time frame for having a home inspected, which is called an inspection period.
In a short sale, this can give you leverage when it comes time to make a final deal.
Not Reviewing Legal and Insurance Details
Buying from a bank comes with risks because they often sell properties as is, without any disclosure. This means you have to do extra research on your part. Normally, a disclosure statement will detail things like whether a home is within a floodplain or if there are unpermitted renovations.
You can get cited by the city if you make renovations without getting them permitted and approved. If this is present in your property, then it falls on you, whether you did the renovation or not.
Not Giving Enough Closing Time
The process of buying a short sale property is a bit longer than with a typical home. This is because the lender has to go over and approve the foreclosure terms and price. This will be lower than what the home seller owes the lender.
Of course, this leaves them with the short end of the stick, which is why they’re not so quick to let the property go. This will tarnish their reputation since most won’t want to get a loan from a bank that has a mortgage on a short sale.
Choosing the Wrong Property
Unfortunately the saying “if it seems too good to be true, it probably is” couldn’t be more factual for buying short sales. In many cases, if the deal is a bit too low for a property, then there’s likely more to it than meets the eye.
This is where common sense comes into play. It’s important to consider whether you’ll be able to afford to rent it out at the same rate or less than the mortgage payments you have. And how much do you have to invest to make the property habitable?
Not Offering Enough
When you’re presented with a short sale, you’re tempted to go as low as you can. However, making low ball offers isn’t the way to go. While the lender is trying to avoid costly foreclosures, they’re still trying to get as much as possible.
This means you could end up outbid, losing your chance of getting the property. Also, if your offer causes a greater loss than a foreclosure would, then they’re not going to accept your deal.
Offering Too Much
While you can make an offer that’s too low, there’s also the possibility of putting too much on the table. There has to be some middle ground when making your offer.
When you end up paying too much on a short sale, you could end up “upside down.” This is when you paid more than the current market value in a market that’s declining. In other words, it’s going to take a very long time to see the value rise to a profitable level.
Any investment you make should yield an ROI. The only way to do this is to buy low and sell high. You can’t do that if you purchase a short sale house with a declining value, especially if it’s lower than what you purchased it for.
Buying a Short Sale Home
Now that you have a better idea of what a short sale is and the mistakes to avoid, it’s time to consider buying a short sale property.
If you’re looking to learn more about short sales and investing in properties, keep tabs on our blog. You will find a ton of great tips and information you can use to ensure you’re making profitable investments.