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Investment Property Short Sales: Why Lowball Offers May Not Work

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You may have recently heard some guru on late night TV advocating a strategy that involves targeting short sales with lowball offers.  Well, although this may sound promising, in reality there are other factors involved that might undermine your efforts.  Yes, it is certainly possible to get below-market deals on short sale properties, but not always.

One factor to keep in mind is that a short sale does not always involve a foreclosure property.  It could simply mean that the current owner needs to sell property that has depreciated in value, and as such the property could simply be worth less than what is owed on the mortgage.  In this scenario, the owner is not behind on his or her mortgage payments, and therefore is not a distressed seller, so he or she is unlikely to accept a lowball offer.

Another factor is that the lending bank will always want to recoup as much of its investment as possible in the case of a foreclosure.  So for example, if the mortgage is $150,000, with a second lien of $50,000 on the property, then the bank’s goal would be to sell for at least $200K.  Now, if the property has been on the market for a long time then the bank might be willing to accept less than $200K, but if the property has only been on the market for a few months the bank will not want to make huge concessions on the price.

The third factor to keep in mind is that the bank will want the offer to be in line with the local market, irrespective of whether it’s a short sale or not.  The bank will usually hire a rental property agent to broker the sale, and part of the agent’s job is to look at recent comps to make sure the offer is reasonable.  If your offer is way out of line, you’ll get a counteroffer.

The bottom line is that although investment property short sales can be bought on the cheap in certain situations, most times your offer will need to be in line with the local market as well as with the lending bank’s objectives.  So set your expectations accordingly.

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