Short Sales And Real Estate Investments
A question that often comes up during our property management training courses is whether or not short sales make good real estate investments.
Many of our subscribers are just getting started with their real estate investments so today I wanted to share my views on short sales vs. traditional sales, and which might be the better real estate investment.
Short Sales As Real Estate Investments
Whenever I drive to or from an appointment or my office, I always try to take a different route. Doing this helps me with my own real estate investments.
When I look at the ‘for sale’ signs on various real estate investments and properties, I sometimes see a sign rider that proudly proclaims that the house for sale is a ‘traditional sale’, and not an REO or short sale.
That tells me a couple of things about real estate investments in today’s market place:
- Short sales are the norm
- Traditional sales sellers feel they are disadvantaged by having a traditional sale
Otherwise, why go through the extra effort of touting that you have a traditional sale?
Why Not Buy A Short Sale?
In my mind the focus of your real estate investments should be on short sales, not on traditional sales.
Traditional sales by private parties are still going to be overpriced compared to what you could get by buying a short sale. Remember, the real estate investments you’re buying are going to be used as rental properties, so some of the problems that will certainly arise when you’re trying to purchase a short sale shouldn’t be a concern.
The Problems With Short Sales As Real Estate Investments
My advice to anybody buying short sales as real estate investments is to have several properties identified to purchase, so if the lender on your first choice isn’t moving fast enough, you can quickly move onto your second choice.
I’m not suggesting that you mislead people in any way. Actually, just the opposite. Be up front with the listing agent and lender, let them know you’re an investor looking at multiple choices for rental use and that theirs is your first – but not only – choice.
Probably the biggest problem I’ve seen with short sales is the length of time it takes to close. I don’t think there’s any malice or ulterior motives involved, but that a couple of factors do come into play:
- The asset manager at the bank is probably overwhelmed by the amount of work she’s expected to do
- Some banks are more motivated than others, depending on the disposition of the total portfolio they have
- There are simply more people involved in a short sale than a traditional sale, which means more potential complications
Cash Flow And The Short Sale
In deciding whether or not short sales or traditional sales make good real estate investments for you personally, I’ll share a quick and easy cash flow analysis that works well for me.
Do the following, step by step:
- Identify a short sale property and a comparable traditional sale property
- Calculate how much cheaper the short sale property is to buy
- Budget the needed rehab expenses to get the property rental ready
- Estimate the potential lost rental income due to the short sale taking longer to close
If you’re still cash flow positive on the short sale property compared to the traditional sale, you’re reader to go under contract and you’ll also have a better idea of what the month by month opportunity cost is of having the short sale as part of your real estate investments.
Feel free to post a comment or drop me a line if you have questions about this property management training article on real estate investments.
Jeffrey Roark
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