Are Short Sales A Smart Play For Investors?

I read an article recently by a fairly experienced real estate agent who was touting Short Sales as the best way for investors to participate in the current market.  The basis for this belief was that short sales provide investors with a low risk way to insure against major changes in the condition (of the property) or in the market, while still retaining the choice to buy.  Hmmm…

I’m not going to knock short sales in general.  I won’t do that simply because I have been around real estate investing long enough to know that you can’t use generalities or broad strokes to determine if any one strategy is good or not good.  Theory doesn’t work in real estate investing; facts and numbers and research are what work to determine the best “play” in any given market and specifically within subsets of the market.

I actually do know quite a few people who have been successful with short sales in today’s market.  But here’s the caveat, most of the people I know who make a ton of money off short sales are the real estate agents who know how to work the system and get their short sales SOLD (and in turn earn their commissions).

As an investor, I have a few issues with pursuing short sales.  And a few problems with the proposition that short sales provide low risk and the ability to be in control.

First, the only way to be successful in real estate investing is if you buy at the right price and/or sell at the right price to make a profit.  If your money is not actively earning you a profit because you’re waiting around the 6 (on the extremely optimistic side) to 18 months (on the very realistic side) it takes to get a short sale done, then you are not aggressively participating in the real estate market. Your money is sitting idle somewhere.

In essence, you’re waiting around to see IF your offer will be accepted.  I do agree that this allows you to exercise control by electing not to go through with an offer if the condition of the property changes or the market continues to decline.  But, in the meantime, you could have been pursuing other deals that were purchased and sold for a profit or rented for cash flow.

What good does it do to minimize risk and be in control if you’re not earning money?

Second, there seems to be a perception that buying a property in a short sale means that you’re getting a wholesale price. This is the same perception that gets inexperienced investors in trouble when they get all giddy about buying properties at an auction house.  They get caught up in the frenzy and excitement of the bidding process and fail to realize they’ve just purchased a home at over 90% of its current market value.  I don’t know the exact number but I have heard that the properties sold at auction houses (not to be confused with properties sold at courthouse auctions) typically do go for well above 90 cents on the dollar.

Realistically, with a short sale you are paying less than what the current owner paid (thus the term short sale) but you are, more often than not, paying the full market price.  Now that may be okay based on your exit strategy, but if you’re flipping for profit and paying full retail then this would be a disaster in the making.

The other thing with short sales is that they can and do affect the overall market value of properties in the neighborhood.   So, if you are successful in getting a wholesale price accepted on the property you are purchasing,  you can bring down the value of the immediately surrounding properties.  If your objective is to flip, you may have just shot yourself in the foot.  You pay less now, but your neighborhood will have felt the negative effect of the price that you secured in your offer.  This is not necessarily a problem if you are using a hold strategy.  If you’re selling for a profit however,  you may have to wait longer for your value to bounce back.

I like any strategy that allows an investor to buy low and sell high. I’ve been fortunate enough to apply this strategy for over twenty years, through up and down markets and always come out making healthy profits.  The past year and a half we’ve been doing that through properties purchased at the courthouse steps.  We do a lot of research to ensure that we only walk away with properties that are secured at a low enough price point that we can turn a profit for our investors and ourselves.   And in comparison to short sales, we can be in and out with our money in less than 120 days, with a nice profit check in hand!  If we were doing short sales, we’d still be sitting around waiting to see if our offer was accepted and the deal was closed.  Heck, we can buy two properties and generate profits twice in the time it takes to do one short sale.

Short sales just don’t seem like a smart play to me if your objective is to make money as quick as you can in today’s market.    And I don’t know about you but I like my money just as fast as I like my cars!