Flipping short sales houses is a great way to make profits under certain market conditions. However, errors can be costly in terms of time and money. In this article we discuss some of the worst mistakes when flipping a short sale house.
Mistake #1: Assuming Everything is a Quick Short Sale Flip
An ideal short sale flip is when an investor purchases a short sale property and at the same time resells it at a higher price. These can be lucrative and fast transactions as the purchase and sale can happen on the same day.
However, in reality, few transactions happen this way in the short sale market. Short sales are generally marketed openly through real estate agents, listed on the MLS, etc. Finding somebody willing to buy a short sale house from an intermediary (you, the flipper) is difficult because the buyer can just as easily get it from the current owner at a lower price.
In most short sale scenarios, you should assume some rehab on the house will be needed before selling it. This takes time and allows you to create value buyer will pay more for.
Mistake #2: Not Enough Days on the Market
Going after short sales that are new on the market could lead to stiff negotiations with the bank. This can significantly affect the profit potential.
Pursuing properties that have been on the market for a longer period of time can mean the bank has not received enough offers, or has grown weary of negotiating with buyers and is more likely to accept a low price.
Remember, the goal is to pay the lowest reasonable price you can for a short sale property. Accept that some properties cannot be bought short enough to flip for a profit. You will often find more luck focusing on properties that have been on the market for 60 days or more.
Mistake #3: Not Enough Improvements Needed on the Short Sale House
Short sale properties can be great investments if they have physical condition issues that can be rehabbed for reasonable cost.
The best short sales tend to be when the owner moves out before the foreclosure is complete. This means the owner probably did not live in the property long enough to develop bad construction issues. This short term neglect can cause easily repairable damages which is an opportunity for house flipping.
Many sellers will live in the property up until the day of foreclosing, putting them in better condition than bank owned or abandoned properties. Look closely at the property for cosmetic repairs and avoid ones with more serious problems.
Mistake #4: Getting Cut Out of Your Short Sale Deal
Finding a suitable property at a low enough price to make a profit on the flip is the biggest problem with short sales. When you do find a good property the buyers you intend to flip it to may circumvent you and purchase it directly from the seller. This cuts you out of the deal.
To solve this, you can buy an exclusive option from the original seller allowing only you to purchase the property.
Mistake #5: Lack of Funds to Buy the Short Sale House
Paying for a short sale house can be an issue for many investors. Going into this type of property flipping without the needed funds will only create headaches, delays, and perhaps even worse.
If you do not have sufficient capital to cover the purchase price, pay off any liens and rehab the property on your own, you will need to get financing. See this article on how to finance a short sale home purchase >
Mistake #6: Committing Fraud in a Short Sale
Fraud is defined as “an intentional deception made for personal gain to damage another individual.” Each legal jurisdiction has its own specific legal definition of fraud, but it is a crime and a civil violation nonetheless.
Creating legal problems for yourself — through misrepresentation or simply “cutting corners” — is a real possibility when flipping short sale houses. Short sale flipping is not illegal, but making misstatements of critical information is.
When working with banks, for instance, you must disclose in writing your intent to re-sell the property for a profit. This can be declared clearly in your contract with the bank.
FHA Loans Used for Flipping
Another way you can get into legal trouble is to use an FHA loan to flip a short sale house. FHA loans require the new owner to live in the home for a minimum amount of time. This precludes you from flipping the house before that, and you are required to sign a declaration you will not do so. Failing to obey this can get you in trouble for fraud.
Flipping a Short Sale House Too Quickly
Not knowing your state’s short sale laws is a great way to inadvertently commit fraud. Some states, like Colorado, have foreclosure protection acts which require full disclosure of facts relating to contemplated sales of the property being purchased. This makes financing 1-day short sale flips difficult, and investors have to hold the property for a longer period, at least 14 days.
The best advice where your state has built-in delays on flipping houses is just to follow the rules and not get too sneaky about short sale flips.
Mistake #7: Violating Anti-Flipping Laws
A short sale flipper can face restrictions from local and state laws against re-selling a house for a period of time. This “anti-flipping” laws can prevent you from flipping a property entirely.
To stop quick flips, cities and states require forms for all parties to sign, such as anti-flip affidavits and arms length transaction disclosures. They are part of the loan package signed with the mortgage documents, and must be completed to get the financing money. These documents are intended to delay the resale of the property for a specific period of time, typically 30-90 days.
Mistake #8: Not Seeking an Attorney’s Advice
It is highly recommended to seek an attorney’s legal advice about possible legal snags you could get into as a short sale house flipper. Plan to involve an attorney in your first transaction, at a minimum. This is particularly true if the property you’re buying has any liens on it.
Mistake #9: Not Having an Effective Short Sale Flipping Strategy
If you plan on doing more than one short sale flip, you need to come up with an effective strategy or blueprint that you can repeat consistently each time. Plan to set a specific period of time to hold the property before a resale. Set up your budget and timeline with plenty of cushion. Use the 70% rule. Be flexible around how long you are willing to hold the property and do not let delays surprise you.
Mistake #10: Expecting Repairs From the Lender
Short sale sellers may at first agree to fix problems with the home, but rescind later on. This could lead to an investor making an offer on a property with wrong cost expectations.
You should assume every short sale house will be sold “as-is”. Short sale sellers are almost universally in poor financial condition, and are unlikely to have the money to fix anything, let alone with good quality work. Don’t rely on them to make or pay for any repairs prior to sale.
Mistake #12: Expecting Short Sale Purchase Terms to be Ratified by The Lender
Lenders in short sale situations tend to negotiate hard and make every attempt to minimize their loss on the mortgage. Be prepared for a long wait and a potential “no” from the lender when it comes to your offer price and any pre-sale conditions (even a clean title).
Worst Mistakes When Flipping a Short Sale House in a Nutshell
Flipping short sale properties can be very lucrative when done without error. Investors interested in flipping short sales should do their due diligence, have their financing well-prepared, know your real estate flipping laws, and practice full disclosure in all your dealings.
Hopefully, this article will help you avoid the worst mistakes when flipping a short sale house.