What's the Rule of Thumb When Buying Short Sale Properties?

Question

Hi Everyone,

I'm looking at a short sale right now. It was originally priced at $180K but now it's going for $200K. The broker ran a comps, with two properties being sold for $255K, one sold at $285K, and one listed for $299K. The subject property has suffered from water damage, and there's a tenant living in the property.

What is the rule of thumb usually when purchasing short sale properties (i.e. a 70% rule for fix and flips)? And would this short sale, based on the numbers I just shared and the condition of the property, be worth it? I'm assuming it's not. Let me know your thoughts.

Phil Z. · Answer

The purchase price formula does not change just because it's a short sale.  As a total guesstimate and depending on the repair costs, you probably want to be in the $150k or less range.

Brent Coombs · Answer

@Sheldon Alex, don't forget to check the fine print. Will the contract ALLOW immediate profit?...

Sheldon Alex · Answer

@Brent Coombs Yeah I believe the listing agent get their commission when closing the sale, so not sure where it's possible for a buyer to get a cut from purchasing a short sale. So will take that with a grain of salt.

Yes this information was helpful @Russell M. Thanks for sharing. I've noted them down and will keep those suggestions in mind should I consider doing a short sale.

Russell M. · Answer

A couple comments, having gone through a short sale in the last 6 months.

1.  The bank will not begin any negotiations until you have an offer on the table that you submit to them.  They will then evaluate it to their criteria.

2.  The price you list it for in order to obtain an offer, and the price the bank is requiring, may be significantly different.  The key here is to speak to the bank and find out what their appraised value is.  They will require approx. 90% of this value in an approved offer.  This can drop slowly based on time on the market and comps.  Knowing it is critical as without it, you may end up with a bunch of rejected offers simply because the price was not quite right.  It also allows you to be more solid on the listing price and when discussing with potential buyers.  As a buyer, this is something you should ask the seller about.  If they don't know what the appraised value is, suggest they find out, or you could be wasting a lot of your time.

3.  The mortgage company I was working with was Ocwen.  They stated in their short sale documentation that closing costs had to be limited to no more than 10% of the sale price.  So, when putting an offer in, plan accordingly.  This probably varies from company to company.

4.  Once you have submitted an offer, or have an offer in hand if you are the seller, getting the completed documentation compiled and sent in as 1 packet is critical.  At least with Ocwen, any document sent individually was generally lost.  If you are notified that something is missing from the short sale packet, obtain the correct documentation, merge it in and resubmit the full packet.

I suppose as a buyer, the complete packet issue is more out of your control, but if there seems to be a long delay and you are interested in the property, it is worth mentioning.

Finally, as @Phil Z.  mentioned, your purchase criteria should not change whether it is a short sale or not.  If you are interested in a property, but it is quite a bit outside your range, and you find that the asking price is close to the Bank's appraised value, then don't waste any more time.  Just walk away.  The banks are not generally interested in negotiating, unless it is for more money.  Also, don't expect the process to be quick.  Ocwen, at least, moves at their own pace, which is extremely slowly.  It almost seemed they were trying to wear us as the sellers, down until we let it go to foreclosure, as they would likely make more money that way.  Be patient, or go find a motivated seller.

Hope this helps!

Brent Coombs · Answer

@Sheldon Alex, commission received by the BUYER? Never heard of that!

Doesn't the listing Agent just get their agreed (normal) commission when they close the sale?

But in any case, please keep in mind their contract rules, which likely prohibit short-term profiting!

Yes, people may tell you there are "ways around it", but, do newbies "feel lucky, .... "? Cheers!

Sheldon Alex · Answer

@Brent Coombs That deal came and went. I'm still trying to understand how short sales work. I know the process of getting that type of deal closed takes more time than a fix and flip, but from what I heard from another investor, you get a commission for purchasing the property through a short sale. Is this true?

Sheldon Alex · Answer

Okay sounds good. Thanks for the advice!

Marc M. · Answer

I haven't gone through the short sale process but I've been told that the listed price doesn't mean much and it's very likely the bank will negotiate a higher price. As I understand it, the property has to be listed and under contract before the bank will start negotiating on what they'll accept. Best of luck and I'm interested to see how it turns out for you.

What's the Rule of Thumb When Buying Short Sale Properties?

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