“What Every Investor Needs to Know About
Short Sale Investing During the Summer of 2008”
With the number of foreclosures and short sales on the rise, investors are doing more and more short sales out of need more than desire. The days of numerous sellers with loads of equity seem to be few. As we continue to invest through this declining market cycle, we must pull out our short sale tools, sharpen them and get to work creating equity.
In answering student questions, we find that so many hit the same roadblocks.
In this special report, you will learn tips to avoid some of the common pitfalls short sale investors fall into. As you work on short sale transactions, keep your focus on the overall picture – getting to closing. Surround yourself with industry leaders that are educated in this arena as it can be a HUGE learning curve for those coming in with no experience.
To help you focus, read the following tips and immediately put them into practice.
Resale Options- Have a plan in advance toward an exit strategy. Make sure you are including 1.78% Excise tax, capital gains, closing costs, real estate fees, permits, updates, taxes, insurance, etc.
Lease Option- This has been a popular choice for those that have longer term capital options. We are finding more and more qualified Lessee’s that are a little shy of approval but make perfect BUM’s- Buyers Under Management. (We may need to change that acronym) We assist in putting together the Lease for the sellers and buyers and work with them on a quarterly basis to approve them for the purchase in 12 or 24 months. If you wait over 12 months to close on the transaction this will be considered long term capital gains that is only at 15% compared to 28-35% within 12 months depending on your income. (See you tax consultant)
Quick Sale- There’s still a large number of 100% financed loans needed and FHA with down payment assistance program has been driving these lately. BEWARE that we are not be able to sell this to a FHA borrower without 90 days of seasoning on title so make sure you include that timeline in on your operating expense. There have been some recent changes but only for banks and direct 3rd party companies representing the banks.
Pipeline – your pipeline must be filling up regularly. Your pipeline is what you fill with deals. You can never turn off your “finding” machine. As you continue to “find” deals, you will continue to fill your pipeline. As you work on them, by sheer statistics alone in this business, some will fall apart. When you only work a few, your chances of closing all of them are slim. That’s why it’s imperative to work smart. A proper pipeline has deals coming in, deals in transition and deals closing, all at the same time. A big investor mistake is stopping the finding process when they begin to work on just one deal. If that deal doesn’t close after a few weeks of attention, they must “find” all over again. This is a huge waste of time. Know your Target – what are your choice deals? For investors, short sales with motivated sellers who aren’t looking for sale proceeds and have a home in bad shape, along with other criteria pertaining to their loan, is the “target” short sale customer. Short sales other than those are a waste of time and will only fill your pipeline with “work” that produces little fruit. As investors looking for large equity spreads in order to create cash flow or profit on fix-up and resale, the deeper the short sale, the better. That’s tough to get on pretty homes, so unless there’s a specific reason for taking the pretty house as a short sale, we pass. It’s important to know your target seller, target buyer, etc. When you can target the appropriate audience, it saves time and that saves money.
Organized – organization is a must as you fill your pipeline and phones are ringing and paperwork is everywhere, especially when you work with staff or partners too. Keep your files labeled consistent with either all addresses or all client names (don’t do some one way and some another); be sure loan numbers are easily found, and whether the seller has one or two mortgages is clear. Use a phone log to keep track of every conversation you have with the lenders and sellers in each file. Anyone who picks up a file in your office should be able to handle the incoming call or question as to the next step. As tough as it sometimes is to actually get the loss mitigation representative on the phone, you don’t want to lose the chance to move a deal forward because the rep can only speak with one person in your office.
First payment default – Be sure to ask important questions to a short sale seller. Questions such as “Do you understand the short sale?” “When did you originally obtain the loan in question?” and “When did you make the last payment on this loan?” Many lenders are insured against first payment and first year defaulting loans. They are either made whole or able to give the loan back to its originator or note seller. That being said, it’s usually a waste of time to work on a short sale where the seller began missing payments in their very first year of the loan. It’s obvious that knowing this before starting on the deal will save you plenty of time.
Loan type – finding out what loan type the seller has is important also. Knowing this upfront gives you an edge on negotiations and offer price. Reviewing the seller’s loan documents is one way of finding out. Another is by calling the lender and asking. For example, if the loan is FHA insured, then you know upfront the lender will accept approximately 80% of today’s appraisal. If that discount won’t work for you, you save time by not even starting on the deal.
Loan insurance - some mortgages are insured by private mortgage insurance, called “PMI”. When you review your seller’s mortgage payment coupon or statement, you will usually see a line item for PMI, which is included in the seller’s monthly payment. You can also ask the lender if the loan has PMI. This insurance protects the lender from default. Again, the lender is insured to a certain percentage of the property’s value or loan amount. It’s your job to find out that percentage by inquiring with the lender. If that percentage will work for you, then proceed with your offer according to the insured percentage amount. If not, don’t get involved and save yourself time and work.
Knowing the loss mitigation representative – as you work on short sales, you’ll begin to work with sellers who share the same lenders. As you begin to develop working relationships with loss mitigation representatives, especially as your short sales close, you can request that specific rep on your next file. When the rep recognizes it’s you again, you can cut through so much of the paperwork right up front. The rep can tell you where the lender needs to be – price wise. This is a tremendous savings on your part. If you’re new to short sales but know investors who are already working with lenders, ask them for a referral introduction on the deals you are getting started with. This can save you a huge amount of time and work. Building a relationship – it’s imperative you build a great relationship with those who can help you get to closing quickly. When you close a short sale transaction with a lender, be sure to send a great Thank You to the loss mitigation representative that helped you get it closed. They normally receive bonuses for closing these but when you send a letter of recommendation, a thank you card or gift, they will remember you forever. That makes your next deal(s) even sweeter to work.
Lender’s short sale package – each time you work with a new lender on a short sale, they will either fax or mail you or the seller their short sale paperwork for completion. It’s important that you receive this package each time you work with a lender new to you. This expedites the process of putting your paperwork together with the seller. When the seller tells you that they have a loan with ABC Bank, you
will already know that ABC Bank does short sales and will not have to wait 24 hours or more to receive their forms. You can keep files with the forms, requirements and contact numbers of each lender. This will be very helpful and appear professional to the seller. Some lenders require a notarized authorization form and have their own form too. You will have their form and be prepared with a notary.
Challenging the BPO– many lenders today are ordering two and three BPO’s per short sale. A BPO is a broker’s price opinion. When you submit a short sale, the lender hires a real estate agent, broker or appraiser (depending on loan type) to see the property and give their expert opinion of value. This opinion helps the bank determine their acceptance of the short sale. Many lenders won’t re-order a BPO just because you didn’t like it until about five or six months later. If the property hasn’t gone to foreclosure yet, you still have a chance to wait it out and hope for a more realistic BPO. You can also challenge the BPO by having your agents prepare a BPO or by hiring your own appraiser. When time is of the essence, you may have to spend a few bucks to make your point.
Work smart – no matter how you slice it, it all boils down to working smart rather than working hard. As you close deal after deal, you will become more and more organized as well as experienced. With your experience, you can train others to assist you – make them partners or employees. It’s easy when you don’t try to re-invent the wheel where proven systems have already been created. That’s really working smart.
Don’t wait to get started with short sale investing. Now is the time to buy and smart, savvy investors are doing just that. Sellers and banks are motivated so you should be too. Short sales are a great way to create equity where none seems to exist. We wish you the best in creating your equity and growing your wealth. If you or someone you know are looking for some advice in this arena please call to schedule and appointment. We would be happy to assist in your first investment.
Bill Black CMP
Certified Mortgage Planner/Branch Manager
America One Finance- Downtown
360-910-3290
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