As real estate markets across the country start to correct, we’re likely to see more short sales than we’ve seen in recent value-growth years. And that’s not necessarily a bad thing. Strategic real estate investors can use short sales to transform their businesses.
As you probably know, a short sale occurs when a property sells for less than the current owner owes their mortgage lender. This happens when a property owner is behind on their mortgage payments and owes more on the home than the property is worth on the market. Instead of facing foreclosure, the owner can get approval from the bank to list the property as a short sale.
Now, here’s how investing in short sales can transform your real estate investment business.
1. You Can Buy Short Sales Under Market Value
Banks would rather short sell than foreclose. If they foreclose, they’re going to have to maintain a property they don’t want, and they risk selling the property for even less if the market is declining. They can save themselves the headache by short selling. This gives you the opportunity to acquire a property under market value. You just need to know how to find these gems.
2. Flipping Is Restricted, but This Isn’t a Problem for Rehabbers
Some lenders prohibit the short sale buyer to immediately flip the property, generally requiring the buyer to keep the home for a minimum of 30 days under the Home Affordable Foreclosure Alternatives (HAFA) program. There's a 90-day restriction on reselling for more than 120% of the original short sale price, too. But don’t let this deter you. In a declining market, the only reason you’d be flipping is that you see extraordinary rehab potential in the property. And extensive rehabs take time.
With a careful rehab plan, 30–90 days is a reasonable time frame for a complete rehab. By the time the project’s finished, your restriction period has ended, and you’re free to flip.
3. With Bank Approval, You Can Start Marketing the Property to Renters During Escrow
Down markets are a goldmine for buy-and-hold investors. You get a property at a low market price (or even under that low market price if you’re buying short sales), and you have an instant head start on profitability.
But for an additional incentive, consider the fact that you can show the property to prospective renters during escrow with lender approval. So if you find a short sale in good condition, you can potentially have your new tenants move in on closing day. With PropStream’s built-in marketing tools, you’ll be able to market the property directly to your target audience and get the tenant screening process underway immediately.
An increase in short sales may not be the sign of a strong real estate market, but with the right know-how and tools, these short sales can transform your real estate investment business.