When Buying a Short Sale as an Investment, Remember the Boy Scout Motto

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There are some great deals out there for investors looking to buy distressed properties—foreclosures and even short sales. But, there are a few things that investor buyers need to be aware of when looking to purchase short sales.

The investor who is buying a short sale and then plans to ‘flip’ or resell the property immediately needs to be cognizant of the terms and conditions of the short sale approval letter. Certain mortgage servicers (such as Bank of America, Chase, and Wells Fargo) place limitations on the terms and conditions of the short sale approval that may impact an investor buyer’s ability to immediately resell the property for a profit.

Some investors purchase short sales in order to hold onto them and rent for profit. With sales prices at historic lows, many residential investment properties purchase in the current real estate market can see annual returns of over 8 percent. Know, however, that mortgage servicers approving short sales may not permit the buyer to rent the property back to the current seller (the borrower in the short sale). Some lenders even require that affidavits be signed by buyers, sellers, and agents verifying that a rent back will not occur.

A third concern for investor buyers may arise with respect to disclosure. Not only is the buyer required to disclose that he or she may be immediately reselling the property for a profit, but other disclosures may be required as well. Many times second lien holders in short sales require a cash contribution in order to agree to the terms and conditions of the short sale. Frequently investor buyers are able to contribute that extra cash in order to get the deal approved. Any cash contribution to the second lien holder needs to be disclosed on the settlement statement and approved by the first lien holder (if the first lien holder is also accepting a short sale).

While a short sale can be an excellent opportunity to pick up a nice property at a good price, it’s important for buyers and their agents to do their homework. Nobody wants to get into a situation where they wait around for several months and then the deal goes south. And, nobody wants a deal to come back and haunt them several years down the road.

It’s hard to predict what the upshot of this wacky real estate market will be several years down the road. And, since I do not have a crystal ball, I guess the best thing to do is to adhere to the Boy Scout motto and ‘be prepared.’

Photo: flickr creative commons by dpstyles

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.