Banks don't want to lose money. The bank is absolutely going to lose a lot of money if someone forecloses on their house – but less so with a short sale process.
Foreclosures are what happens when the owners can't pay their mortgage and the bank sells the home to the highest bidder, trying to recover some cash, as they're technically negative on that house. You can see some homes, that are valued at $200,000 or more, foreclosing for under $100,000.
It's a great deal for the buyer, but not such a great deal for the bank. A short sale, on the other hand, is a step above a foreclosure. The bank is still going to lose some money in the transaction, but not nearly as much as they would with a foreclosure.
And if you're looking to buy a house, happening upon a short sale seems like you've hit the lottery – but the short sale process isn't for the faint of heart. Want to learn more about it and see if it's the right strategy for you? Keep reading.
What is a Short Sale?
Imagine that you bought a $200,000 house. You put 50,000 down as a down payment (good for you!) so your mortgage is 150,000. Now for whatever reason, you can't afford your mortgage anymore. You can't pay your bills and a foreclosure is looming.
What do you do? You, as the seller, could look into a short sale. You put the house on the market at a low price, and collect offers. Then you go to the bank and tell them "we can't afford to pay back all 150,000 – but would you accept one of these 50 offers that are less than what we owe, but aren't as costly as a foreclosure?".
The bank then looks through the offers and says yes or no. If they say yes and accept a particular offer, the people essentially sell their mortgage for less than it's worth back to the bank, in exchange for their home.
But do you see the catch there? It was hidden, so if you didn't, no worries. Here's the issue: short sale homes can collect tens or even hundreds of offers. That's not such a good thing for a buyer, who thinks they're getting an unbelievable deal and are just "waiting on the bank's approval".
In reality, there's a very, very small chance that a buyer's offer is accepted on a short sale home, just due to the volume of offers.
What is the Short Sale Process?
That's not to say that a buyer can't get a house at an unbelievable deal with a short sale. It's entirely possible – but you can't get too emotionally attached to one house (or one low price). If you want to "win" a short sale, here are four things you need to know.
1. Bulk it Up
If you're determined to get a house for a really good price through a short sale, you have to put in offers on a lot of houses. One investor who makes YouTube videos says he and his team put in 100 offers on different short sales every day.
Then, months later, they might win 1-3 out of those 100 short sales. It can take that long and be that competitive.
And here's the issue with that for most people. They don't have the capital to go through with three short sales, even if we were to win them. So how do you amend that strategy for someone with a more realistic budget?
Keep putting in offers on short sales, but don't do 100 a day. Maybe do one every other day, if the house is in your area. A short sale isn't something you want if you have to move in ASAP. It can be months before the owners even take the offers to the bank, let alone get them approved.
2. Know When to Engage in the Short Sale Process
Short sales are not quick sales, even though the "short" in their name makes it sound like they are. It takes longer to go through with a short sale than it does to buy a house the conventional way.
That's to say, you have to know when to start the short sale process. If you're just starting to think about moving but you still have six months to a year, then you could play the short sale game. But if it's May and you have to move by August – skip the short sale process.
If you put all your eggs into that basket, you could very well find yourself moving into a too-small apartment and still waiting on approval come August.
3. Make a Higher Offer
One good way to get a head start on short sales is to research the true market value of the home. Sites like Zillow make this easy, and you can see what homes around it are worth. Now – you absolutely shouldn't offer the full market price.
That defeats the purpose of a short sale. But if it's listed for 50% of what it's worth, come in at 70% or even 75%. Remember – you don't really care what the owners think of the offer, it's more about what the bank wants.
And the bank is going to lose money on this sale, no matter what. So if you can make that gap smaller for them, they're more likely to approve your offer.
4. Be Very Patient
If you haven't figured it out yet, short sales aren't for people that lack patience. You're not just going to get that good of a deal without paying some sort of price. In this case, the price is time.
If you can put up with waiting then you're ready to play the game.
The More Offers the Better
Now that you know about the short sale process, what do you think? Will you try to get a home for a good deal, even if it means waiting a while? Let us know.