5 Common Mistakes Made While Buying a Short Sale Property

Who doesn’t love a bargain, especially if you find a deal on an investment property in Dallas/Fort Worth? Buying a short sale property can be a bargain, but it can also be a bad investment when the deal seems too good to be true. A good real estate investor will take the time to evaluate the sale and understand what their return on investment will be once they’ve purchased the property. The biggest problem we’ve seen investors run into with a short sale property is not correctly estimating the amount of capital that will need to be spent to get the property in selling shape, or a livable condition in the case of rental property.

What is Short Sale Property?

When a home is sold for less that the amount owed on the property, it is called a short sale. In such a situation the lender does not recover the entire amount. Short sale is common when the home value depreciates. Concluding a short sale is possible only with the lender’s permission.

5 common mistakes made while buying short sale property:

 

  1. Overlooking structural problems: Left with no choice but to give up their homes, some owners might damage the home out of anger. In case of unoccupied homes, signs of neglect begin to show. Get an inspection before you make an offer on a short sale. Also, if you’re an investor who plans on doing the work yourself, be very aware of what your limitations are when it comes to repairs. If you aren’t doing the repairs, it’s always worthwhile to work with a contractor you trust.  Get them involved in the buying process so you know the needed investment before your close on the property.
  2. Not looking into insurance policies and legal documents: Reading through the insurance policy will give an idea of the extent of coverage. Read the policy to know if the home was built over a flood plain or if any illegal renovations were done. For most houses sold on short sale, the bank does not provide a disclosure. It is the buyer’s responsibility to dig in and find relevant supporting paperwork. If you don’t research the home’s history, then buying a short sale isn’t a good idea.
  3. Rushing into closing the deal: If you rush into the deal there’s a chance of regretting the decision in the first week of taking ownership. Also, in the case of short sale, the banks take longer to pass the approval. This period is longer than what it would take for the completion of buying a traditional home. First, the lender must approve the decision to either foreclose the deal or commence a short sale. Most importantly, getting a loan to buy a house on short sale is a task in itself. If time is a constraint, choose another home. I would recommend you only consider buying a short sale home if you’re able to pay in cash. Financing a short sale can be next to impossible if you use a traditional lender.
  4. Making a bad decision: Assumptions are the mother of all problems. Assuming that the present deal is the best there is will land you between a rock and a hard place. Before zeroing in on the house ask yourself these three questions:
    • If you do end up buying the house, will the rent or sale price after rehabilitation compensate the mortgage payment?
    • Would you still consider buying the house as a smart investment should the price value further drop by 20 percent? This is a tough question to ask, but if you’re just starting out you need a cash safety net.
    • If you decide to move into the house, how much will the repairs cost? Should it cost more than or equal to the mortgage amount, drop the house, look at more options.

    If the answer to the first two is yes, look into your finances to work out a way to buy the house. The last question will help you prepare for repair costs in the future.

  5. Presume that the bank will approve of the short sale: Not every offer made gets approval from the bank. The primary lender, either the bank or a third party, consider an array of factors before passing the approval. One such factor is fair market value. Here the lender evaluates the seller’s finances to ensure that the short sale is the only way out. Not all sellers will qualify for this hardship.

Short sales can be great investment opportunities, but short sale properties can also be a risk for investors.


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