How to Invest in Short Sales Step By Step

Lower priced homes, low competition, and the chance to help a current distressed homeowner avoid foreclosure: there’s many advantages to investing in short sales.

So here’s the question: why aren’t you already?

This may be because purchasing a short sale can be more complex than a typical real estate transaction.

If this is the case, keep reading, because in this article, we’ll break down everything you need to know about investing in short sales.

Let’s go!

What Are Short Sales in Real Estate?

Short sales happen when a homeowner chooses to sell a property for less than they bought it for.

This normally happens when the homeowner is struggling to pay their mortgage, putting them in a distressed state.

A short sale helps them avoid foreclosure and prevent severe damage to their credit score. A short sale can also help homeowner recoup some of the money they owe on the property. 

Since the buyer and the lender are just trying to sell the property as quickly as possible, short sales often come with a much lower price tag than comparable properties in the area.

This makes them particularly attractive for real estate investors. 

How Do Short Sales in Real Estate Work? 

A short sale starts when a homeowner needs to sell their property and cannot recoup the amount they currently owe.

Unlike a foreclosure, the owner always initiates the short sale on their own, rather than the bank starting legal proceedings. 

A homeowner will usually initiate a short sale if the threat of foreclosure is imminent.

However, they might also opt for a short sale if the real estate market is particularly bad in their area, with no signs of improving in the near future.

For example, during the 2008 financial crisis, short sales became more common as home values dipped well below their purchase price.

If homeowners wanted to move on, they often had no choice but to make a short sale. 

Once the homeowner has decided they want to make a short sale, they need to get approval from their lender.

This process can take several months to complete, because the lender needs to provide extensive documentation proving that this type of transaction is necessary. 

After the lender approves the short sale, the property will hit the market. The homeowner is responsible for marketing the house and finding a buyer.

And that’s where you as a real estate investor come in. 

When the property is sold, the purchase will cover most of the homeowner’s outstanding mortgage debt. However, they will still be responsible for paying the remainder back to their lender unless the lender forgives the debt. 

Advantages of Investing in Short Sales

As a buyer, there are a few key advantages to investing in short sales. These include: 

• Lower prices: Since short sellers need to sell their property quickly, they’ll often accept relatively low bids compared to other properties in the area. 

• Less risky than other distressed properties: Foreclosed properties are often neglected for months or years before purchase. However, this isn’t usually the case with short sales, because they’re typically occupied until the time of purchase. 

• Less competitive market: Since short sale transactions are more complex, many buyers avoid them. This means you’ll have less competition when bidding on properties you’re interested in. 

Disadvantages of Investing in Short Sales

There are also some disadvantages that are important to be aware of when shopping for short sale properties. These include: 

• Time-consuming: Short sales typically take much longer to finalize than a standard home purchase. This can prevent you from working on other projects. 

• Extensive paperwork: Since short sales need to be approved by a lender, both the buyer and seller will need to complete extensive paperwork. 

How to Find Short Sales

You can search for local short sale listings directly using the MLS.

These listings are usually labeled as short sales, which makes them easy to find. 

You can also partner with a local real estate agent who specializes in short sales.

They can help you find unique short sale properties before they’re officially listed.

Many properties will go into preforeclosure before the owner decides to do a short sale, which makes these properties easy to identify. 

How to Invest in Short Sales Step-by-Step

Want to start investing in short sales? Here’s a step-by-step look at how to buy these properties. 

Step 1: Prepare for financing

Before you start shopping for a property, you’ll need to get approved for a mortgage. Getting approved ahead of time is particularly important in a short sale transaction. 

Step 2: Find a short sale property

Once you’ve been approved, start shopping for properties that fit your criteria. Partnering with a real estate agent with short sale expertise will make this process easier. You should research each property thoroughly before making a final decision. 

Step 3: Make an offer

The next step is to make an offer to the seller and their lender. Do your research on market values and short sales in the area to find an appropriate purchase price. Keep in mind that the lender needs to approve your offer.

Step 4: Inspect the home

Some short sale homes will require repairs. Have the property professionally inspected so you can prepare. Keep in mind that you won’t be able to negotiate the sale price based on the condition of the home, as short sales are done as-is. 

Step 5: Close the sale

The final step is to close the sale and get the keys to the property. Keep in mind that this can take time as short sales are more complex than traditional sales.  

Short Sale vs. Foreclosure: What’s the Difference?

That may bring up the question …

What’s the difference between a short sale and a foreclosure?

Well, the biggest difference between a short sale and a foreclosure is that a short sale is initiated by the homeowner, while a foreclosure is initiated by the bank.

In a short sale, the bank allows the homeowner to sell the property for less than they owe.

In a foreclosure, the bank seizes the property due to missed payments. 

Since short sales are a voluntary process, these properties are typically in much better condition than foreclosed homes.

This makes short sales much more attractive to investors. 

The Bottom Line: Short Sales

If you’re looking for new ways to grow your real estate portfolio, investing in short sales may be a good option for you.

While it does require a little more time and effort to finalize these sales, you can also find quality properties at fair price points. 

Consider looking at short sale properties near you so that your next investment can potentially be your most profitable one yet.