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What to Know About Buying a Short-Sale Home as an Investment

By Dr. Teresa R. Martin, Esq., REIA NYC

As the US housing market continues to show signs of a healthy rebound, there are a couple of interesting trends that are affecting how investors buy real estate. On one hand, property values have been rising throughout the country. On the other hand, however, while the demand for home ownership is strong, the supply of available properties has been dwindling.

For some real estate investors, especially those who have a hard time qualifying for a traditional mortgage, finding a good bargain is becoming more important even as the tight supply of properties is making it more difficult to accomplish in practice.

Using Short-Sales as Investment Opportunities

For this reason many investors are turning to distressed home sales, particularly short- sales, in search of a good deal. While the number of short sales, also known as pre- foreclosures, may have declined over all compared to a couple of years ago, they certainly haven't disappeared.

With a short-sale, the seller of the home owes more money on the mortgage than the property is worth. This person is now trying to negotiate a deal with the mortgage lender (usually a bank) in order to avoid foreclosing on the home. In theory, if the lender agrees to accept less than the amount owed on the mortgage, then the transaction is a win-win on all sides. The seller can avoid a negative blow to his or her credit, and the lender does not have to deal with a foreclosed property. The buyer of the home may also enjoy a nice price discount.

What You Should Know About Short-Sales

In practice, however, profiting from a short-sale is not always so easy. If you are interested in buying a pre-foreclosure property, then there are a few things you need to keep in mind:

You will have to deal with the lender. Though the lender does not own the property in a short sale, it still must approve the sale since it will be the one taking the loss, not the seller. In many cases, this means that you won't have so much bargaining power. For example, you may find it extremely difficult getting the lender to stick to the listing price. The lender may consider the seller's listing price to be too low and will either reject your offer outright or make you a higher counter offer.

Make sure the lender is open to a short-sale. If the lender hasn't yet actually approved the short sale at the time of your offer, realize that it may take several additional months before such an agreement is made, and even then, there is still no guarantee that the short sale will go through.

You will need to have patience. Short sales tend to be much more time- consuming than foreclosures and traditional home purchases. Banks, in particular, are known to take several months before responding to an offer. So, go in to the process prepared to wait.

Don't assume that you're getting a good deal. Obviously, lenders do not want to sell properties below market value, and they will do what they can to keep their losses to a minimum by attempting to sell the property as close to the real market value as possible. Don't assume either that the lender will lower the price of the property to account for any necessary home repairs that were revealed during a home inspection.

The bottom line to all of this is that investors looking into short-sale properties need to proceed with caution. Though there are opportunities to be had, you need to take the whole process with a big grain of salt.