Short sales – what can go wrong and how to avoid loss
While short sales inevitably form a part of most real estate investors’ business models, they are laden with pitfalls that can be avoided or managed to make sure your real estate investing business does not suffer.
This article goes though what can go wrong with a short sale and how you can avoid loss to your business.
Short sales can create a lot of equity and profits and make good deals even better or create good deals from deals that were otherwise marginal or non-existent.
The following is a few things that can go wrong in a short sale
1) Short sales take time
Typically it takes two to three months for a short sale to be completed. Sometimes it can take much longer than you expect, sometimes as long as 6 months.
Do not be surprised if your file is lost, or the documents you send do not find your file for weeks. It is therefore important to be prepared for these delays and not have short sales as your primary source of income.
2) Rejected offers
As much as you may think your offer should make all the sense to the lender and that they should accept your offer, sometimes they just reject them.
This means you might have to go with their counter offer or increase your offer price. If the offer does not make business sense, you need to be ready to drop the deal.
3) Shaky sellers
It is not unusual to have your sellers develop cold feet to the short sale process. Lenders need a lot of information, including a statement of hardship where the seller explains the financial difficulty that forces them to be unable to continue making payments. Usually they may need to see proof income, bank statements, etc.
On top of this they may request for more information before they can make their decision.
Some sellers may get discouraged by this process and give up in the middle of the process. As the real estate investor, it is therefore important to explain to the sellers what is involved in the short sale, and the expected time lines and possible pitfalls that can be expected.
As long as they understand the process, they are unlikely to have a change of heart in the middle of the process.
4) Unable to close
You have an approval from the lender but your financing is not ready. Typically, banks will give you a time period within which you must close the deal.
If you are using private money or hard money to close the deal, it is important to make sure you have the process well ahead and ready to close if you get an approval.
If you are a realtor who has submitted a short sale offer to the lender on behalf of a buyer, it is important that you get the buyer scrutinize the property so they know exactly what they are getting for the money.
It is not unusual to a buyer back out or notice problems or repairs and requests to lower the price to cover them.
The bank may accept or reject such counter-offers, but being prepared can save you from this experience.
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