If you are looking at properties that you may want to invest in or develop, you may have seen short sale properties listed time and time again. The low prices may have caused you to wonder whether or not they would have good property development potential. Here is what you need to know about the basics of short sale properties and how to tell whether a particular property would be a good one to develop.
What a short sale is
A short sale often gets confused with a foreclosed property but although foreclosed properties and short sale properties have some features in common, they are actually very different. A foreclosed property is one where the owners have completely defaulted on their mortgage. This may have been money borrowed from a lending institution or money that was obtained through government programs. The property has been seized and placed up for sale.
A short sale, on the other hand, is one where a homeowner is several payments behind on a mortgage but has not completely defaulted on their mortgage. They are often still living in a home and are trying to sell it in order to get out from under their debt.
Why short sale properties have lower prices
A short sale property will often have a lower price than any of the comparables that are currently on the market. This is because the owner has gotten permission from the lending institution to sell the property for less than the amount owing on that property. When a normal property is put up for sale, the owners do not want to sell at a loss if they can avoid it. They need to recover a specific amount in order to make a profit or at least break even on a sale. This is not the case with a short sale property.
What you need to be aware of when looking at short sales
There are a few things that you need to consider when looking at short sale properties for the purposes of development. One issue is that these deals can take longer than a standard real estate transaction would. This is because the seller and the lending institution must both agree to the offer you make. This may take months and the outcome is not always certain.
A short sale may also be in poor condition. You will often need to purchase it in "as is" condition. If there are significant renovations or repairs that will need to be done you may find that it ends up driving up the price and can turn a great deal into a property development nightmare.
You also need to look at why a property is listed as a short sale. If it is simply that the owner has fallen on hard times it may be a good move to purchase their property. If it is because the real estate market is depressed in a specific area you may find that it will be difficult to rent out or to sell at a profit. Again, this may make a property less desirable as an investment.