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Pros And Cons of a Short Sale in Real Estate Investing Header image

Pros And Cons of a Short Sale in Real Estate Investing

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Short sales and other types of distressed sales (foreclosures, bank-owned sales, etc.) make up about 12.5 percent of all home sales.

Some people think that short sales are a bad thing, but that’s not always the case. There are some definite benefits to them from an investment perspective.

If you’re considering buying a short sale home, keep reading.

Explained below are some of the pros and cons of a short sale for real estate investors. You’ll also learn more about the process and the best way to handle it.

What Is a Short Sale?

A short sale is a tool for distressed borrowers. Distressed borrowers are those who are behind on their mortgage and/or have a home that’s underwater (meaning it’s worth less than the balance on the mortgage).

When a homeowner short sells their home, they typically initiate the process. This is different from a foreclosure, where the bank informs the homeowner that they’ll be foreclosing on the house. Short sales still have to be approved by a lending institution before the homeowner can move forward.

Once the lender has approved the short sale, the homeowner will negotiate with a buyer to agree on a sales price for the house. Then, the lender will approve the purchase.

Many homeowners choose a short sale over foreclosure because short sales have less of an impact on the seller’s credit score (compared to foreclosure).

For more information on your credit score and credit repair, click here. 

Pros and Cons of a Short Sale

There are pros and cons of short sales for homeowners, but they’re not the only ones with skin in the game. There are also pros and cons for investment buyers looking to purchase short sale homes.

The following are some pros and cons you ought to keep in mind if you’re considering buying short sale:

Pros

When you buy a short sale home, you can often get a good deal on a property. Because the homeowner and the bank both want to sell the home quickly, they usually offer it at a lower-than-average price.

There’s less competition for short sale homes, too. The short sale process is quite lengthy, and most people don’t want to wait around for it to be complete. There’s less of a chance that you’ll get caught in a bidding war for a short sale home.

Buying a short sale home is also much less risky than buying a foreclosure. Homeowners usually occupy their home while short selling it. Because they’re the ones handling the sale, they’re less likely to damage the property or neglect it.

Cons

When we say that the process of buying a short sale home is lengthy, we mean it. It takes several months — sometimes even up to a year — to get the sale finalized. Creditors have to approve the offer along with the seller, and the escrow process often takes much longer than average.

It’s important to note, too, that you might not always get a great deal with a short sale. Don’t just assume that you’re getting the lowest price possible. Sometimes, when the lender wants to recoup as much money as they can from the sale, they’ll raise the price of the home.

Often, short sale homes need a lot of work after they’re purchased. The owners might not have neglected or damaged it, but they also might not have taken as good of care of it as possible.

If someone is short selling their home because they’re in a difficult financial situation, they likely haven’t been doing as much maintenance as the average homeowner. There might be issues with the plumbing or the roof that require immediate attention and can be costly to fix.

Short Sale Tips for Investors

If you decide that you want to take on investing in a short sale home, you’ll need to be strategic. Here are some tips that will help you ensure you’re getting the best deal possible on a short sale home:

Do Your Research

Do plenty of research before choosing a short sale home in which you want to invest. Look at online listings and search courthouse listings to find short sales in your area.

When choosing a home, figure out how much is owed on it relative to its value. Look for homes where a high amount of money is owed — you’re more likely to get a good price on these homes as opposed to ones where the owner has lots of equity.

Ask About Liens

Be sure to ask the owner about liens on the home. Liens are payment agreements between a buyer and a lender.

Find out the lender that is the primary lien holder as well.

It’s a good idea to confirm the information about the liens by conducting a title search on the property first.

Figure out Your Finances

To speed up the short sale process, it helps if you know exactly how you’re going to pay for the investment property.

Do you have the cash ready to go? Have you been pre-approved for a loan?

If you can prove that you have the money and are ready to purchase, you’ll have a much easier time buying the house quickly and the right price.

Examine the Property

Finally, don’t forget to examine the property. Take a good look around it yourself to see if there are any obvious repairs needed.

Reserve the right to have the home professionally inspected, too. Make this a condition before you sign anything or agree to buy the home.

Learn More About Short Sales

As you can see, there are a lot of pros and cons of a short sale that you need to take into account before you dive in and invest in a short sale home.

Keep this information in mind (especially the tips on buying short sale homes) so that you can make the best investment choices for yourself.

Do you want to learn more about short sales? If so, be sure to check out the Short Sale section of our website today.

You’ll find all kinds of helpful articles here that will teach you everything you need to know about short sales from both the buyer and the seller perspective.

A Short Sale Isn’t the End of The Road; Things to Look Forward To

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When the housing bubble burst in 2008, it was a very dark period for many Americans with almost ten million losing their homes to foreclosure or short sale. With foreclosures on the increase for the first time in almost five years, it’s becoming a real possibility for many people again, but it isn’t as bad as it may first seem. Explore what happens and what you can look forward to in terms of a short sale in the guide that follows.

Firstly, What is a Short Sale?

A short sale is when you sell your home for less than the mortgage you owe on it. This means that the lender doesn’t get all the money that they are owed. A short sale is permitted in several conditions:

  • You are in negative equity, which means that you owe more than the home is currently valued at
  • The home’s value has decreased substantially
  • The lender has given permission

Your lender writes off the difference between the amount you owe on the property and how much the home is worth.

Things to Look Forward To

  1. Your Credit Score Will Recover Quickly

If you keep paying your mortgage until the short sale, then you will be in pretty good standing afterward. Usually, it can take about two years for a lender to accept your application for a mortgage, but some people have bought homes within six months. Your credit score will dip initially, probably by around 150 points, and although that may seem a lot, it’s much less than you would lose with a foreclosure. Think of it as a minor drawback, rather than the end of the world. Plenty of people recover from short sales. A new trend of boomerang buyers (people who lost their homes to short sales between 2007 – 2013) is projected to make up about 17.5% of the housing market.

  1. Help Available

Even when you’re down and out, there is help available. The FHA (Federal Housing Administration) has provisions for those who had to make a short sale because they lost their job. There is a Back to Work loan program which can help you reapply for a home loan in only 12 months after selling your home in a short sale, as long as you can prove that you lost 20% of your earnings. There are lenders out there who are sympathetic to those who made short sales and are happy to consider individual cases. Don’t simply give up!

  1. Becoming Cash Smart

Most people have never been taught about property law or buying a house. They simply learn as they go. It is built into the American dream that you grow up, get a job, buy a house, start a family. However, at school or college, they don’t teach us the basics of how to deal with these. We tend to learn as you go, and of course, mistakes happen.

If you have to sell your home in a short sale, when it comes to buying again, you will know better what you need to do. Anyone who is buying for the second time is better equipped. They know what to expect and the mountains of paperwork required. They also know what went right or wrong last time. If you have lost your home in a short sale, you will probably qualify for some housing counseling, which is invaluable to teach you what you need to know about buying a house.

Five of the most valuable things you learn when you’ve gone through a short sale are:

  • Not to overextend yourself next time around
  • Be more careful about what you buy
  • Planning to stay in a property for longer, at least five to seven years
  • Put a higher down payment on a property, so your monthly payments are more manageable
  • Be prepared for unexpected circumstances, such as death, dips in the property market, job loss etc.

  1. Avoiding Foreclosure

You’re probably wondering, “How is this something to look forward to?” but talk to anyone who has been through a foreclosure and you’ll understand why. Firstly, foreclosure is painful for all parties involved. A foreclosure stays on your record for ten years and it’s usually at least seven years before you can even consider buying another property.

You won’t be able to borrow money from normal lenders, so it could push you further into money problems. It affects your credit rating massively. Also, even with your home gone, you could be held liable for the money owed to the bank. The bank can obtain a deficiency judgment from the court for the monies owed, and you will then need to pay this also. Avoiding foreclosure could be the best thing that you do for your credit.

  1. Going Mortgage-Free

When your short sale goes through, it gives you the opportunity to move to a new area, to try out somewhere you may have thought about or to move near a good school for your kids. When renting you don’t have the same responsibilities as a homeowner and after being through a stressful year or two with money, this can be really refreshing. Although you’ll still have a monthly payment, it’s not as stressful as a mortgage. You aren’t locked into this loan and you have much more flexibility. If you want to move in less than a year, you can. People get caught up in the idea of owning a home, but after you have got rid of one mortgage, you may find that renting is a dream for you.

Peace of Mind

If you weigh it up, selling your home in a short sale could open the door to a different life to the one you have now. You’ll feel so much relief from being free of the shackles of a mortgage that you may never go back to having one. However, if you do want one, then you’ll be eligible for one far faster than if you go through a foreclosure. So, try not to think of a short sale as the end of the road, merely a fork that leads you onto a new road of your choice, full of possibility.

The First Steps Everyone Should Take Before Investing In Real Estate

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While it is quite common for everyone to seek some form of financial security through real estate, making wise investment decisions can often prove more difficult than they may realize. One of the first mistakes that people often make is not realizing that buying real estate is not the same as buying a retail product. One must have a systematic approach and recognize that much more is involved than finding the property you want and writing out a check.

Once you understand that purchasing real estate is more about the process than it is about the sale itself you’re well on your way to making good investment decisions. When you recognize the different stages of buying investment property the entire experience will become far more manageable than one might realize.

Step One – The Realtor

One of the biggest decisions you’ll have to make is to choose a good realtor. This should not be made casually as you will need to rely on that individual’s professional knowledge and expertise to lead you in the right direction. When you consider the weight of the choices you make in the different aspects of real estate investments you need to be absolutely sure that the guidance you get from your realtor will not lead you in a way that could cause you problems in the future. Unlike other investment options, real estate investments require a commitment that will take many years to satisfy. A good realtor could be your best ally or your worst nightmare so the choice you make will be one that you’ll have to live with for a long time.

Step Two – Prequalify for Your Loan

While some people will start their real estate search by looking at different homes before they begin the loan process there is good reason to get a prequalification from your financial institution. Even though this step is not a requirement many well-established and experienced realtors do expect it. One of the reasons for this is because it gives them the opportunity to identify you well ahead of an in person meeting and it also sets a price range that will help you to narrow down your search for your new property.

Prequalification is not the same as actually applying for a home loan; it takes only moments and can be done over the telephone if need be. If you have chosen a good realtor then they will be able to refer you to some of the more trustworthy lenders in the area. However, if you choose not to prequalify for a loan it is quite likely that you may be limiting yourself from some ideal properties that may be available.

Step Three – Decide on Your Needs and Wants

Your next step is to list your specific needs and wants in your new home. This step will be much easier if you’ve already prequalified for your loan. At this stage you can confidently determine the location you want to live in, space requirements, and any amenities you will want. You’ll know what price range you can reasonably expect to start your search in and just how much of your dream home you may realistically be able to find within your set parameters. Taking this step will certainly help you to avoid disappointments on the road to home-ownership by keeping you within the acceptable limits in the entire process.

Step Four – Start Viewing Properties

If you’ve carefully made the previous three steps then the fun will start with step four. Actually going to different homes and walking through is the point that every home shopper looks forward to. It is at this point that you get the tactical experience that most people enjoy when they start to look at properties. From this step you’ll measure each home you look at against your list of expectations.

It is at this stage that you’ll discuss with your realtor the different parameters of the market in the particular area. Make sure that you ask about the average list price for similar properties in the same area, and how many days a home will stay on the market before it is sold. Your realtor should be able to provide you with all of the information you’ll need so that you can choose the right property to pursue.

There are many different steps that a future homeowner must make in order to find the ideal property for their investment. In addition to these four steps a potential owner will have to pursue financing, have inspections made and even more. Still, with the right professionals at your side to walk you through the entire process there is no reason why making a successful real estate purchase can’t be accomplished successfully.

How Technology Has Brought In A New Age Of Real Estate Investing

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Whether you’re buying a piece of property or you’re selling you’re probably thinking about the recent struggles that the real estate industry has faced in the last few years. With a bout of foreclosures, an ongoing recession, and a sudden downturn it is easy to understand why many may be facing their decisions with more than a little trepidation.

Still, there has been real evidence that the real estate market can and has proven to be profitable for both buyer and seller in many ways. One of the reasons for this is the new way to find, select, and purchase property. With the many different technological advancements now available, investing in real estate can be very rewarding.

Using Mobile Devices

Today, rather than looking at newspaper ads and real estate books people are now turning to their mobile devices to get needed information. People are using smartphones, tablets, and other portable devices to collect data needed in real time. Those who are buying properties can quickly gain access to homes for sale as soon as they hit the market and those selling properties can quickly collaborate and negotiate deals quickly and easily.

With apps readily available, contracts, bids, and other important documents can be transferred from person to person instantly allowing for deals to be made with increased efficiency. And now with the ability for E-signatures to be applied to any document deals can be made and sealed without having to deal with the logistics that were most common in the past.

Easier Search

In the past, searching for the right property was often the biggest challenge for home buyers. Searching the web and sifting the many real estate listings could be a time consuming venture. However, with the new technology available a potential home buyer can sift through the thousands of listings and narrow down the list based on their own specific parameters, speeding up the search for new homes exponentially.

Making your property search mobile has made finding the right location to invest in much more efficient than ever before. Rather than having to sift through tons of information and waiting for documentation to be delivered, reviewed, signed, and resent, decisions can be made at a moments notice. The information you receive from these mobile devices can be filtered based on a number of parameters that you the investor suggest; it could be your geographic location, price range, or even the individual qualifications of an expected agent.

In addition to all of this the information you glean can be delivered and communicated within seconds making it possible to find that right real estate investment property in record time.

The Virtual Tour

One new feature that technology has done for those who are looking to buy real estate is to provide the virtual tour. This feature is a means for a potential buyer to view a piece of property without having to be on site until they are ready to seriously consider its potential. It also helps agents and realtors to show a particular property to more potential buyers without expending the added effort to navigate the different logistics to get all parties together at any given time.

Accessibility

The fact of the matter is that most people already have access to this new technology. The challenge that they now face is learning how to take these advantages and use them to the best of their ability. With the ability to finalize transactions without a face-to-face interaction more deals can be completed much more efficiently.

The world of real estate has changed drastically over the years. The times of pouring through newspaper advertisements and searching the real estate listings to find the right property are gradually fading into the past. With modern technology at your fingertips finding the right piece of property to invest in is easier than ever. You will be able to save not only time and energy but by extension save money too in your quest to find the perfect home investment.

Today’s real estate industry has changed drastically over the years; with the nation recovering from the real estate crisis of the past consumers are now becoming much more wary of their investment decisions. They want to find, negotiate, and seal the deal with fewer hassles and pay less commissions at the same time. This means that a realtor will have to deliver on their promises much more thoroughly than ever before and with far less time to do it in. This could be next to impossible if it weren’t for the advancements of modern technology over the years to make the job that much easier.

Basic Loan Structures For Real Estate Investments

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For the average person considering buying their first home the realization of all the different decisions that need to be made can be overwhelming. One quickly recognizes that buying a home involves much more than finding the right place. In addition to shopping for the right home you also need to shop for the right financing and the right expert advisors as well.

The good news is that if you take enough time to research the different aspects of each phase you will not only save your money but you can even save your time and energy as well. Once you have determined the right short sale market where you invest in it is time to start your search for the right kind of financing.

There are many different types of loans that a potential homeowner can secure that can vary based on many different factors.

The Traditional Loan

These are fixed-rate mortgages that are extremely difficult to qualify for. The requirements for these types of loans are often very stringent and depend a great deal on a variety of factors including your credit score, income level, amount of down payment you have to offer and other expectations.

Fixed rate mortgages are not insured or guaranteed by the federal government and will usually require you to obtain your own mortgage insurance policy for protection. The advantages of this type of loan is the lower than usual interest rates and the fact that the interest will not fluctuate but will remain fixed throughout the lifetime of the loan. This provides the buyer with that added sense of security that can give them peace of mind.

FHA Loans

FHA (Federal Housing Administration) loans provide a variety of different loan programs for real estate investing. They usually require a much lower down payment than the traditional loan but are much easier to obtain. These types of loans are the preferred choice for first time buyers since their credit requirements have a simpler process they must meet than other financing options.

VA Loans

The US Veterans Affairs office guarantees loans for veterans. It is important to understand however that the VA does not actually issue loans itself but merely serves as a guarantor to many qualified borrowers allowing them to get into the home of their choice. With the VA backing your loan application it can make it that much easier for you to find the financing option that could get you into the home of your choice.

There are many other financing options to choose from for the new homeowner so it would be well-advised to carefully shop around for the one that can fit your circumstances best. While anyone may be able to recommend a particular short sale financing option it is important to understand completely that the choice you make should be based on your own personal circumstances and not on the opinions of others.

Purchasing your first home is one of the most exciting things you can do but when you approach it with an effective strategy you can take the sting out of the stress of shopping for your first home.