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Were you cruising through the MLS or know an REO agent that’s given you the scoop on a short sale that’s piqued your interest but don’t know how to go about making an offer? You’re in luck as we’ve got a few ideas for how to successfully buy a short sale with cash.
In order to buy a short sale with cash, you’ll want to read through the contingencies to understand the deal, get your paperwork together, plan your offer along with a strong earnest money deposit, verify the short sale is approved by the lender, and then wait to see if the bank accepts your offer!
Let’s dig in.
First, What Is a Short Sale?
Before we dive into making an offer, let’s first talk about what a short sale is and what obstacles you may face trying to close a deal on one.
A “short sale” is a term used in real estate for homes that are in pre-foreclosure. Potentially the homeowner is behind on mortgage payments and the bank has run out of patience trying to get the property back in good standing. But the problem is foreclosing is a complicated process that can be drawn out for years where the bank incurs not only a further loss on the property, but also has to deal with legal fees, coordination with the local sheriffs to evict the homeowner, upkeep costs, and so on. So instead of going through the arduous process of foreclosing, the bank or seller decides that they will take an offer of less than what’s owed to them to quickly move the property and avoid the whole mess.
Essentially, it’s an opportunity for a homeowner who’s underwater to quickly get a soon-to-be-foreclosed property off of their hands by offering a good deal to an interested buyer who can deliver a purchase contract to their lender. There are a few hoops a buyer will have to jump through like being approved by not only the bank, but the homeowner as well, but overall it can be an incredible opportunity for those who can time it just right.
Will a Cash Offer Give Me a Better Deal with the Bank?
Honestly, it depends. You would think that offering cold, hard cash to take a property off of the bank’s hands would be a good thing, but in the end, it really comes down to the profit and loss the bank determines with your offers vs holding out for another offer or foreclosing.
Common sense would make you think that taking a property off of their hands would be a welcomed event but bear in mind that you’re competing against a lot of data that’s at their disposal to weigh the better profit realization for them.
The lender will do is called a “loss analysis.” This is where the bank weighs the mitigating factors over whether it’s cheaper for them to accept your offer, or if it would be more profitable for them to accept foreclosure and either fix up the property or sell as-is. On the surface, a bank may like the idea of a cash buyer as that’s less headache for them, but that doesn’t mean they’re willing to sacrifice a better price if that means holding onto the property a little while longer.
Now, if you’re dealing with a servicing company that has specific quotas to meet, that’s a different story. You’ll probably find them more open to accepting cash offers quickly to help fulfill their quota and make room for new properties.
What Will I Need to Make a Cash Offer?
To make a cash offer on a short sale you’ll need to put your money where your mouth is. Lenders are going to want to see bank statements that show you have the liquidity to follow through on the deal. In addition, you should be able to offer a significant down payment or larger-than-normal sum of money for an earnest deposit (usually more than $5,000) to show the bank you’re serious.
What If I Don’t Have the Cash Outright?
There’s some wiggle room when it comes to “cash” offers, but it can get complicated and subject to being rejected by the lender. However, if you have your eye on a property and aren’t liquid enough to pay in full, there are a few options.
- Show Preapproval from a Bank – If you’re prequalified for a loan from an institutional lender, use that to your advantage. Show the bank proof of prequalification to help your odds at closing this deal.
- Get a Government Loan – While this might be a tougher sell, especially on the government’s side, FHA and first-time buyer loans and credits might be able to help reduce any risk the bank feels you might be bringing to the deal.
- Use a Hard Money Lender – Hard money lenders will offer capital in exchange for collateral and don’t often offer to finance for the full amount of a mortgage, so consider using hard money lenders if you need money for things like down payments or if you’re running short of the full short sale price.
- Seek Private Financing – Private lenders like friends, family, or even private rehab loans from companies who specialize in this are able to help finance your short sale but expect to pay interest and have strict payback terms.
I’m Ready…How Do I Buy a Short Sale With Cash?
First, review the contingencies of the short sale and make sure you have a good understanding of the investment you’ll be taking into your portfolio. Ensure there aren’t any liens on the property, inspect the home thoroughly so that you know what sort of work needs to be done (especially if it’s being sold as-is) and make sure that this is actually a worthwhile investment for your time and money.
Next, you’ll need to get your paperwork in order to present the offer to the lender. Move quickly in this step, as short sales are often competitive investments and the homeowner or lender may receive multiple offers depending on how hot the market is.
Once you’ve got your finances squared away and are ready to make an offer, it’s time to get down to it. The name of the game here is to show that the bank has little risk in giving the deed over to you, so be ready to show up with a strong earnest money deposit to help get the bank’s attention and show you’re a serious buyer.
From there you’ll need to verify that the short sale is actually approved by the lender, as many times this might not be the case (or at least, not yet). Once you or your broker have verified this, you’ll most likely be subject to a waiting game while the bank reviews your offer and bank statements (or prequalified offers), and weighs them against the potential profit they could get by holding.
Don’t feel discouraged if the lender is dragging their feet, unfortunately, that’s just part of the deal when it comes to short sales. But there’s profit to be made for those who are patient and who come to the table well-equipped with a cash offer.
Keep an eye out for short sales in your market, as these can be bargain opportunities for the right investor. Use a few of our tips here to help make sure your offer stands out and gets you one step closer to closing a deal instead of your competitors.