Understanding the Pros and Cons of Short Sales For Real Estate Investing

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Everyone has heard the term short sale. In fact, you probably know people who have at least considered a short sale for their home, if not actually sold their home short.

So what is a short sale and how can real estate investors benefit from this type of real estate investment?

A short sale is defined as a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.

In other words, a short sale is really about getting the lender to agree to discount the existing loan balance. This usually happens because of a financial hardship. So you can see why short sales are particularly relevant in the current economic downturn.

What's the rub? The lender has to agree to the price at which the short seller is selling the home in order for the debt obligation to be resolved – the loan amount paid off.

Real Estate Investing Opportunities with Short Sales

So how do real estate investors benefit from short sales?

Primarily, the benefit lies in getting a home with a motivated seller at fair market value. There are plenty of myths out there about buying a short sale home and making a killing doing so. While I would not say you can not make money, it's not quite as simple as it sounds.

Why? Simply put, while it's true that banks are not in the business of selling homes, they are also not in the business of making stupid deals. They're looking for homes to bring market value, no less.

Does this mean as a real estate investor you should not look for short sale homes. Not necessarily. But understand that because the lender has to agree to the price, you can bet that the price will be pretty close t market.

Understanding the Risks of Short Sale Homes for Real Estate Investing

Yes, as with any investment, there are risks. And you need to know them before jumping into the real estate market.

What risks are associated with purchasing short sale properties?

First, understand that because the seller has to negotiate with the lender, instead of two parties to the deal, you now have three. And the bank is not always the most efficient of enterprises with regard to property transactions. In other words, be prepared to wait. The process will probably not be quick. Especially if you're looking for a deal. This is primarily because of the banks willingness to wait for an offer on the property at or new market value.

Further, do not think that the bank, having taken its time to process the paperwork, will give you the same option. Closing times on these properties are often as tight as 10 days. That's right – you've got to be ready to close in a hurry if you plan on investing in these homes.

So if you can handle some of the challenges with short sale properties, there are opportunities out there for savvy real estate investors. But know the process prior to getting started. Understand the pros and cons before purchasing a home.

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Source by Chris Mura

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