Archive for the ‘Short Sale Investing’ Category
July 14th, 2009 | 
Author: With the Foreclosure Epidemic in full swing, a lot of investors are finding themselves more and more in the realization that one of the more profitable methods of going about their real estate investing business is to engage in short sales.
Problem is, short sales are complicated. In fact, they’re downright excruciating.
Regardless what ‘experts’ say about short sales being painted in bad light or about it being overly criticized for its inherent complexity as compared to more straight forward investing methods such as wholesaling and rehabbing, and that short sales are actually a lot less complicated than most people think of it, fact remains that doing short sales is something that you can learn in the fly and apply in a specific and relatively fixed 1-2-3 procedure.
Let me show you what I mean.
Listed below is a ‘short list’ of the steps involved in doing short sales. But before that, let me make a disclaimer. These steps are not all inclusive in the sense that these may vary greatly depending on the property, the state, the lender, the level of distress that the homeowner is in and a whole bunch of other factors that play into the short sale deal negotiation.
A. Determine the Value of the Property – this can be done by doing an evaluation of sold properties in close proximity to the house in question within the last 6 to 12 months. A licensed realtor who’s got access to the MLS (Multiple Listing Service) can do a Comparative Market Analysis (CMA) to determine this. However, investors would have to find a way to do this – which is usually to have realtor they know do it for them.
It does not end there though. Once you determine the Fair Market Value (FMV) of the property by averaging the selling prices of similar properties in the same area, you would also need to determine After Repair Value (ARV). This is the value of the house after repairs have been introduced to the property.
Most of these houses need to have some repairs done on them. Some more than others and some less. It all depends on several factors such as the sense of responsibility of the occupants, integrity of construction, neighborhood, etc.
Indeed, this step calls for a lot of math and analysis. Come up with an inflated estimate and your short sale deal would surely come crashing down like a house of cards. Undervalue the house and you’ll end up digging inside your own pocket to make the deal survive. In short, you would have to very precise in determining the value of the property so as to make the deal work.
B. Figure Out the Lenders Broker Price Opinion (BPO) – this is the main factor by which the lender determines the value of the property. It differs from the FMV in the sense that you determine FMV while the lender comes up with the BPO.
This is one of the trickiest parts of the short sale negotiation process in the sense that your FMV should be as close as possible to the lender’s BPO. Too much of a difference between these two values and you can practically say goodbye to your short sale deal.
Understandably, the lender’s BPO would normally be lower than your FMV. However, you cannot simply rely on this generalization. You have to come up with an FMV as close as possible to the lender’s BPO if you hope to have your short sale approved.
That having been laid out, this is one tough ‘mind-guessing game’.
C. Learn The Loan Types – there are different types of loans available for short sales and each one would have a different effect on your short sale deal.
For example, submitting a short sale with a conventional loan will give rise to a different set of requisites than a short sale submitted with an FHA loan. There’s also the same effect on the BPO as FHA loans don’t require a BPO but a Government Appraisal.
This knowledge will also be important in determining NET offers to be accepted by the lender as they have different minimum acceptable offers for both conventional loans and FHA loans.
It is therefore important that you familiarize yourself with the different requirements that go with different loan types so you don’t end up groping in the dark when push comes to shove.
D. Learn How To Deal With Junior Lien Holders – sometimes when negotiating a short sale, you find out that there’s a second mortgage on the property. Most of the time, you simply relate with the second mortgage holder the same way you do with the original mortgager.
But every so often, the second mortgage holder would have a separate set of requisites.
Remember, you are dealing with a lien holder who’s holding an over-leveraged asset (the house). This makes the plot a whole lot thicker.
This is usually where most investors stop before they totally lose their sanity.
I mean, it’s a lot to have to put up with the original mortgage holder’s demands. Multiply that by two and you’re looking at a prospective cause for investor ‘death-by-short-sale’.
E. Closing – provided you’re hardy enough to have reached the part where your short sale has been approved and that you’re actually going to close on the deal, ask yourself:
How much am I making on this deal? Is it commensurate to the amount of work I put into the deal? Will I be willing to go through another round?
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Again, these steps are not all-inclusive. The steps vary greatly depending on the deal, the lender, the amount owed on the property, the level of distress that the homeowner is in and a lot more.
Now you know why “short sales suck” has developed into quite a cliché among real estate investors.
But, don’t get me wrong.
Short sales in this present economy, is a true gold mine as foreclosures are occurring left and right.
Luckily, a number of firms and companies have begun offering ‘short sales done for you’ services, wherein for a set fee (or a percentage, depending on the merits of the deal), investors simply submit a potential short sale deal to these companies and then they’ll be required to submit certain documents which are readily available through the homeowners themselves and then the third party company does the rest. The investor simply waits for the short sale to be approved and for it to be closed.
Being the number one real estate investing resource site, DoDeals.com has joined the short sale bandwagon by offering its Short Sales Done 4-U Service available to certain membership levels.
Many thanks go out to Cory Boatright whose article written at the DoDeals.com Coaching Corner became the main source of the materials used for this blog post.
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Most people believe that investing in real estate during a recession is a risk that’s not worth taking. They claim that the market is too volatile, that no one is buying real estate since cash is very limited and that instead of buying houses, people opt to rent apartments since it’s a lot friendlier to their pockets and because most of them probably got foreclosed on and so on and so forth.
This is simply untrue.
You see, from the last argument alone (that people are moving to apartments and rental properties because they probably got foreclosed on), you’ll already be able to see two real estate investing opportunities – rental properties and foreclosures.
All you simply need to do is to try to look at the situation at a different perspective.
It may be true that this entails a risk that’s too high for comfort – if you’re using traditional or ‘old-school’ investing strategies.
What you need to understand is that recessionary times call for a more creative approach to real estate investing. You don’t necessarily have to abandon the business altogether. You just need to ‘shift your gears’ and approach your deals from another angle.
So what strategies DO work during a recession? Here’s a few:
Owner Financing / Subject To’s / Lease Options
A lot of homeowners who need to sell their houses find it difficult to find buyers so most of these houses are just sitting there vacant and sometimes even neglected but most of the time, these homeowners continue to make mortgage payments on them so these properties become more and more of a financial drag that they need to get immediate relief from.
Now you don’t really need to have these properties at a deep discount in order to make the deal work. As long as you can make the homeowners agree to owner finance the properties to you and so you can take the property under terms then that’s already a good deal.
For example, the property is worth $100K. You can buy it for $200K and still make money.
How do you do it?
If the owner is willing to owner-finance it to you (and most of them would be happy to do that), and you don’t have to make any mortgage payments for 30 years and after that time, you pay them $200K, do you think that will make the deal work? Of course it does! That’s because the home price will go up and you didn’t have to pay any interest and all that.
These strategies work really well right now because a lot of these homeowners really need to sell their houses fast.You just need to get these houses under flexible terms to make it work.
Wholesaling
In the present economy, this strategy is really hot. This is because you can get a house at deep discount so you can still sell it cheap and make a lot of cash.
The reason you can do this is the same as the first one, we discussed. Homeowners are really desperate to get rid of their unwanted properties right now because they have a hard time finding qualified buyers and a lot of them would settle for literally pennies on the dollar (40 to 50 cents to the dollar). All you need to do is grab these properties and flip them for a quick profit.
For example, a property with an actual value of $100K which the owner desperately needs to sell and would settle for $50K. You get the property under contract for $50K, flip it to another buyer or another investor for $60K and you pocket a quick and easy $10K.
Short Sales
Short sales work like a charm nowadays because there are so many foreclosures going on and a lot of homeowners actually owe more than the actual value of their houses (mostly because they probably got their house on 100% financing or did a cash-out refinance and now that their property value dropped, they end up owing more than what the property is worth).
With foreclosures at an all time high, banks are finding themselves with more foreclosures than they can actually handle and so they are need to move these properties real quick.
That’s where short sales come in.
In a nutshell, what you do in a short sale is to negotiate with the bank to accept payment on a property that is lower than what is owed on it or even lower than its actual value. Banks are very willing to do this since they’re not in the business of owning homes. Simply put, they’d rather take a short sales offer on a home and make some money than to be stuck with a bunch of properties they don’t need and want.
Indeed, as a real estate investor, there are a lot of alternative ways of approaching deals in the present economic situation that will still prove to be profitable for you.
You don’t have to listen to all those doomsday-mongers who keep screaming that the world is coming to an end.
Well is you go ahead and believe them and abandon your real estate investing business, that may exactly be what will happen to you.
It’s true that the times are difficult, but that does not mean all hope is lost. You just have to look at the situation from another angle and take it from there.
Remember, “Extraordinary times call for extraordinary actions.”
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1. All Cash - Fastest and easiest method. Can close within hours. Requires larger discount.
This is the most straightforward, easiest and fastest method to sell your home. You simply agree on a price with the real estate investor, and he pays you the total in cash. Because of the limited availability of cash and the ability to close within days (or even hours if necessary), the investor will expect a larger discount on the sales price of the house.
2. Private Financing - Similar to All Cash. Can close within days. Requires larger discount.
With private financing an investor can purchase your home and close the sale within days. The investor gets financing from a private lender and pays you cash for your agreed upon price. Because of the costs associated with private money, the investor will expect a larger discount on the sales price of the house.
3. Owner Financing - Investor makes monthly payments to the seller in exchange for property title. Requires equity in the property.
You sell your house to the real estate investor (convey title), and the investor makes payments to you for your equity in the house. This is a great option if you don’t need the entire sales price now and would rather have a monthly passive income without doing any work. Since IRS treats this as an installment sale, you are only responsible for the interest and gain that you receive in the current tax year. You won’t receive all of your money upfront, but usually you will earn some interest on the equity in the house.
4. Subject to Existing Financing - Investor takes over monthly mortgage payments to the lender. Mortgage remains in seller’s name.
Real estate investors can take over your existing mortgage payment. This is a terrific option when there is an existing mortgage with good terms. The mortgage stays in your name, so timely payments by the investor help improve your credit rating.
5. Agreement for Deed - Investor makes monthly payments to the seller. Deed does not transfer until the amount is paid in full.
The real estate investor makes monthly payments to the seller. The seller maintains their current mortgage in the home and retains the deed until the payments are paid in full. This is much like a car loan in which the bank owns the title until the note has been paid. This method requires more paperwork because there are more state laws regarding this type of transaction. However, the investor will take care of these details for you.
6. Lease Option - Investor leases the property from the seller with the option to purchase. The investor is not required to purchase, but the seller is required to sell during the term of the option.
The real estate investor leases the property from the seller with the option to buy the property at a later time. The investor has the option to buy but not the obligation to buy. The seller is obligated to sell during the term of the option. While you will receive monthly payments during the term of the lease, you are not guaranteed a sale of the property. However, if you do not sell the home to the Investor, you get to sell the home with all of the accumulated appreciation during the lease term
7. Short Sale - Investor negotiates a discount on what is owed to the lender on the property. Used when the seller is behind on mortgage and owes more than the investor can pay for the property.
When a seller is behind on payments and owes more than the amount an investor can pay for the property, the investor can negotiate with the seller’s mortgage company to accept a discount on what is owed against the property. Part of the condition of the short sale is that the seller must not receive any proceeds from the sale of the property. This option has become more common because it is better to short sell than to suffer foreclosure on your property. While the lender has the right to place a deficiency judgment against the owner, the investor often can obtain a waiver from the lender, which helps protect the seller’s credit
8. Bank Financing - Investor obtains financing from a bank. Usually the investor is pre-approved, and the sale can close within two or three weeks.
Because of the amount of properties they own, many real estate investors can take advantage of good loan programs and get bank financing to purchase a property. Often, the investor is already pre-approved for a loan so the investor can still close quickly. This the transaction can close within two or three weeks.
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To get the most out of your Short Sales, all you need
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think that:
- You need to have money
- You need to have credit
- You need to close on the property
- You need to be an expert
- You will lose your escrow money
What if I told you…
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