What Is an Investors-Only Short Sale?
Let’s say you’re a home shopper looking for a primary residence, but you come across a listing marked as an investors-only short sale. Is this listing off-limits to you if you’re not shopping for an investment property?
What is an investors-only short sale, anyhow?
Short sales are homes that are typically sold as is, so an investors-only short sale listing probably means that the house is in such a state of disrepair that it won’t qualify for a standard owner-occupant loan, according to Phil Lunnon, a Realtor® in Lakewood, CO.
“The seller most likely believes that, whatever issues the house has, an investor is best suited to get it straightened out,” he says.
So what kinds of problems could such a property have? We’ll get into that. But first, let’s start with the basics.
What is a short sale?
“A short sale means that the seller does not expect to be able to pay off their loan in full from the proceeds of the sale, and will be asking the lender to accept a less-than-full-amount (‘short’) payoff,” explains Lunnon. In other words, the owner owes more on the house than it is expected to sell for, but the owner needs to sell and doesn’t have the cash to cover the difference.
A short sale may or may not be in pre-foreclosure, which generally means three or more mortgage payments have been missed and the bank has begun the foreclosure process.
Why are investors drawn to short sales?
Residential real estate investors are looking to buy homes below market value. Once they score a good deal, they will typically either fix up the place to sell for a profit or rent it out as an ongoing income source. Since short-sale homes are typically sold below their market value, it makes sense that investors seek them out.
A savvy investor can get a good deal on a short sale, but it takes experience to actually flip a house and turn a profit. (You knew that, right?) Buying any kind of distressed home is a gamble. Issues such as foundation problems, bad wiring, or termite damage could mean spending too much to fix the house and cutting into potential profits.
Why would a short sale be for investors only?
Banks tend to give investors preference in a short sale for two reasons: They typically understand the process of buying and fixing up a short sale over someone going through a short-sale closing for the first time, and they are generally cash buyers who don’t need to rely on mortgage approval. Some short-sale homes have problems so severe that most banks would refuse to approve a mortgage on the house.
Here are examples of issues that make a home “unmortgageable”:
- Serious roof damage
- Major termite infestations
- Crumbling walls or foundations
- The home is situated in an avalanche, lava, or mudslide zone
- It has an oil tank too close to the home
- It doesn’t have a kitchen or bathroom
- It has construction or additions that were unpermitted or in major violation of code
- It has other major issues that make it officially uninhabitable
Of course, the seller doesn’t actually care if you are going to flip the home or live in it. If you are a cash buyer, you have a shot at an investors-only short sale. But before you throw down your hard-earned cash on a major fixer-upper, reread the list above and ask yourself if that’s really a home improvement project you want to take on.