Short Sale Investments Complicated by Three Factors

Additional Short Sale Complications and Issues

In addition to the lengthy and unpredictable timing of the short sale process, three further complications exist for short sale investors:

Multiple mortgages

Here's a first big complication: If the seller secured multiple mortgages on the property, the short sale transaction may require working with multiple banks and investors, leading to what might fairly be called the "goat rodeo" scenario. I don't think I'd ever try a multiple mortgages short sale transaction. And my sense is that the complexity of a multiple mortgage situation often leads inevitably to a foreclosure.

Note: Anecdotal evidence suggests that a majority of short sale transactions ultimately fail. This is probably one of the bigger reasons for failure.

Deferred maintenance and repairs

Here's another issue to be aware of: You may learn very late in the short sale process about liens and repairs that you (not the bank) will need to pay. For example, the home inspection may lead to the new information that furnaces or other appliances have been removed sometime while the property sat empty for months.

You may also learn about delinquent homeowner dues or contractor liens. Unfortunately with the short sale transaction, you probably can't go back to the bank and renegotiate the deal. Remember how long and arduous the road has been to get to this point in the process.

Basically, what you will need to do is either eat these additional costs or walk away from the deal. Note that you might be able to walk away from the deal and then immediately make a new offer.

Accordingly, you need to factor into your original offer the possibility that the property will require some significant outlays for items such as unpaid homeowners dues or surprise repairs. Obviously, what you want to do is lots of good research up front to really identify any repairs needed and any liens that need to be paid. Then you need to factor these items into your offer price-and probably explain the factoring to the bank.

Note: Annual repair and maintenance costs for a home often equal to one to two percent of the home's value. But the seller of a short sale property often has not been able to keep up with this burden for the last year or two of their ownership. A two to four percent chunk of the short sale discount, therefore, may stem simply from this deferred maintenance.

Short sale process adds costs

And a third and final point about the short sale process: You will probably have extra costs related to investigating a short sale property that you simply won't have with a traditional purchase.

You may need to spend extra money to get information on past due homeowners dues, liens and other assessments. For example, I've seen both the county assessor and the local homeowners association charge for an answer to the question, "are there past due amounts owed?"

Further, you may because of the time lag end up paying for two inspections or two appraisals. A lot can happen both to property values and property condition in, say, six or eight months.

Finally, because the homeowners almost by definition can't afford the property and may have even already abandoned the property, you may need to pay extra amounts for items like turning on the power (so you can see if the appliances work).

I'm going to talk later in more detail about how to make sure that you're getting the short sale discount. But the costs mentioned in the preceding paragraphs need to be generously compensated for via the short sale discount. If you're not getting such a good deal that you can easily pick up these extra short-sale-related costs, you maybe shouldn't do the deal.

Next Section: Making Sense of the Short Sale Purchase Discount

Additional Information for Shortsale Investors

If you want additional information about how tax laws work for a short sale investment or for an individual running a business based on short sale investing, you may also be interested in one of my downloadable e-books shown below:

Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...

One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.

Using an S corp for your real estate investing? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.