Why do Short Sales take so long.

I’ve been strongly promoting the idea of buying Bank Owned properties and avoiding short sales like the plague. This is my justification for that stance.

An explanation of the process will probably help. Many home owners today are “upside down in their home. That is, they owe more on the mortgage than the house is worth, generally because they took advantage of loose lending guidelines and bought with 100% (or close) financing or refinanced an existing property and took all the equity out of it.

At some point, for whatever reason, they find they can no longer pay the mortgage, and often will try to sell the home. After they miss about 3 mortgage payments the bank(s) will launch foreclosure proceedings, and generally it will take about another 9 – 12 months (in South Florida) before the actual foreclosure sale.

During that period the price on the home is steadily reduced to the point where offers start coming in, but of course the sale cannot be completed because the seller owes far more than the offer and has no cash to bring to the closing table. At that point a third party, generally the realtor, opens a conversation with the bank(s) about forgiving part of the mortgage so the deal can go through.

Now, the bank is not about to roll over and write off tens of thousands (maybe hundreds of thousands) of dollars so a big negotiation begins. In some cases the mortgage was covered by Mortgage Insurance so the bank is going to get paid anyway, and so has little incentive to negotiate. Good luck trying to find a contact in the MI company to talk to.

Firstly there may be several lien holders involved. Maybe 2 or more mortgages, HOA, probably property taxes, and maybe some other liens. A specialist known as a loss mitigator is called in, and they have to get agreement on who is going to take what percentage of the loss.

Then the creditors are going to want to know why the seller can’t pay and will require a detailed review of the sellers finances. The seller will have to submit tax returns, income statements, credit card statements, and so on and will have to justify every penny they spend. They have to prove beyond a shadow of a doubt that they cannot afford to pay the mortgage

Then an independent review of the value of the property has to be made, and unless the sale price is higher than the market value, the deal may be rejected. A full appraisal needs to be done and they will also look at the other properties on the market, recent sales and properties under contract, and complete a careful analysis of the property to establish a “Fair Market Value“. That is the price at which the sale will go through.

If the offer is below the market value they will reject the offer, probably without renegotiating the price. At that point the deal is dead. It is very difficult to “steal a deal” on a short sale.

Also it’s likely that Real Estate agents will be asked to cut their commission. Often the agent will agree, but then their broker will nix that idea and the transaction might fall through for that reason.

Finally the seller has to agree to the deal. You’d be amazed how many sellers still think they are going to walk away with cash or refuse to agree “because my house is worth more than that“. Often they will just get tired and frustrated with whole process and walk away.

The net result is that after the contract is written, there will be a delay of generally at least 90 days and up to 120 days before you know if your offer is accepted. In addition only about 20% of short sale contracts make it to closing.

By the way the bank will probably require at least a 5% deposit which they will hold during the negotiations.

Once the contract is agreed, you get a short period, often only 14 days, to close and if you don’t the your deposit is at risk.

ON THE OTHER HAND.

If you wait a little longer the bank will be forced to complete the foreclosure and remove the seller from the house Now they have a problem, because the house is standing empty and deteriorating. Not only that, because they are now the owners they have to pay the taxes, HOA fees, insurance etc. It’s costing them money.

They will usually put the home on the market immediately. Sometimes they’ll clean it paint it and fix it up a bit, more often they don’t, so the property looks like c**p and no one wants to buy it.

They generally price the property just below competing homes on the market. However they don’t wait long before they start knocking big chunks off the price. They’ll keep price cutting till someone makes an offer. It doesn’t matter what market value is, or what an appraiser says, they take whatever they can get.

Generally it’s not worth trying a low ball offer. I find they won’t accept anything below 90% of the current asking price. They might put your offer in a hold file and come back later but that’s not likely. However you will get an almost instant response, sometimes just yes or no, but usually a counter.

This where I come in. I’m tracking around 200 bank Owned properties at any time.  I know many of the listing Realtors. They are generally not very ‘user friendly’ because they are working for the bank.  They don’t like showing homes, and just want to process offers.

I can generally get a response without giving them a deposit check.  Sometimes they will share the current status with me and hint at what it will take to get an offer agreed.  Usually I can at least find out if they have other offers.

The offer always has to be in writing and the bank generally have their own set of contract forms. The package has to be complete before they’ll submit it to the bank, and the less hassle they get the more helpful they are. In most cases we get an answer within 24 hours and we can then either continue to negotiate or move on to the next one.

Once a property hits it’s sweet spot, there may be several offers come in close together. Price is not the main consideration, although obviously it’s a factor. The most important thing is to convince the bank you can and will close if the offer is accepted. Proper presentation at this time is vital.

So in summary, you should prefer Bank Owned over Short Sales because,

Much higher probability of success.

Better Price

Fast response

Much less stress

Reverse Mortgage foreclosures

This note is about reverse mortgage foreclosures.

 

A reverse mortgage is a mortgage where the bank pays the owner of a property rather than the other way around.  Anybody over the age of 62 may qualify for a reverse mortgage, and may use it either to purchase a new property or may use it as a refinance to cash in equity on the property.

 

A reverse mortgage does not have to be repaid until after the last occupant leaves the property to move on to a better place.  At that point the heirs may either pay off the mortgage and take possession or they walk away and the bank repossesses the property as a foreclosure.

 

Now you might be wondering how this effects you as the buyer of a property.  Well here's the thing.

 

If you see the magic phrase sold under 24 CFR206.27 then you might also find these words in the small print..

 

i) this applies when the mortgage is a reverse

mortgage insured by HUD, (ii) it describes the process for what

happens when the mortgage becomes due, either because of death or

another reason, and (iii) much of the rule is irrelevant to buyers. But

item (g) at the end of the rule is relevant to buyers: it means that (a)

the lender that now owns the house isn't going to make any repairs

unless they are required by local law or HUD standards for HUDinsured

properties, and (b) the property cannot be sold to a buyer that

has a family, ownership, employment or other relationship with the

lender. (Seller can't accept offers below list price)

 

 

In other words nothing, especially the price, is negotiable on this one, so don't ask.

 

Now if you are over 62 (the more over the better) and a little short of cash, you should definitely consider buying with a reverse mortgage.  They give you the some of the cash and you don't have to make any payments.

Where are all these foreclosure properties.

One of the most common questions I get is "where can I find all these foreclosure properties".

Guess what?  They are hiding in plain sight!

The simple truth is that all the foreclosures that are available to purchase are listed on the Multiple Listing Service (MLS) operated by your local Real Estate Board.   This is simply the most comprehensive, most up to date, most accurate database of property for sale on the planet.

ALL bank owned foreclosure properties offered to the general public are listed on the MLS.  There is no secret list available only to insiders, that common mortals can't see.

Now yes, you can look on Zillow or Trulia or a hundred other real estate websites, and, heaven forbid, even Craigslist and find REO property for sale.  But guess what?  They all get their basic information from the same place. The Multiple Listing Service.

And contrary to popular belief, anybody can get access to the MLS very simply.  If you go to my website you will find you can search directly for property right on the MLS, and there's even a way to specify bank foreclosures.

However the very best way to get foreclosures in your email is just to ask.  Use the link below to access the request form and I will set it up for you.  No charge.  And I'll do it for any county in Florida.  What a deal!!

Click here for foreclosures in your email everyday

What's the 90 day flip rule and why is it still bugging me?

I may be about to get bitten by this one again.

Before the great mortgage meltdown, FHA had a rule in place that said in effect, "if you buy a property and then try to flip it within 90 days for 20% more than you paid for it, then we won't approve a mortgage for the purchase!!".

The purpose of this rule was primarily to prevent evil property investors, buying foreclosures (usually HUD homes) dirt cheap, cleaning the carpets and painting the walls and then selling to unsuspecting first time buyers for twice what they paid for it.

Since those days the whole process of selling REOs has got a whole lot more sophisticated and giant profits are a whole lot harder to come by for flippers.  In any case about 3 years ago HUD "suspended" the rule because with the mountain of foreclosed property on the market the powers that be were looking for any way at all to reduce the pile and investors were deemed not to be so evil after all.

Just to be clear the 90 rule says you can't write a contract within 90 days, so effectively the seller is likely to have to hold the property for at least 4- 5 months.

Now as I said before FHA suspended the rule a couple of years ago and although they've threatened to reinstate they haven't done so yet.  HOWEVER, one of the results of the recent persecution of the mortgage industry has been a level of paranoia on the part of underwriters that results in an additional layer of rules being overlaid on the FHA guidelines by individual lenders, so that apparently the rule is still going to affect one of my sales, unless we can find a way around it.

Any ideas?

What about buying on the Courthouse Steps?

I'm often asked about buying foreclosure property "at the courthouse steps".  That is buying a property at the actual foreclosure auction.

Now the first thing you need to know is that foreclosures are no longer sold on the courthouse steps like you sometimes see in the movies.  The county clerk no longer comes out in front of the courthouse with a pile of papers and sells a defaulted property to the highest bidder while the owners look on in dismay and disbelief.  

Like most things these days it's done on line. The process is complicated and obscure, except to those doing it as a business.

The second thing you need to know is that this is an area of real estate that's best left to the experts.  If you don't already know in great detail how the system works, you should not even be considering it.  Here's a couple of basic reasons why not.

The bank doing the foreclosing is the entity that gets paid.  If the property is worth less than the face amount of the mortgage (i.e. nearly every foreclosure these days) they will simply buy it from themselves and no one else gets a look in.  In most cases you would have to pay more than the property is actually worth.

You have to pay cash, and there is no refund.

The new buyer is responsible for taxes, liens, HOA fees, code violations and all sorts of stuff.  Also you probably won't get a chance to inspect, before you buy.

You will be up against professionals who do this stuff all day long and will beat the amateurs out every day.

So please, if you are looking for a home or a few good investment properties, forget the courthouse steps.  It will make you crazy, and broke.

Asset management explained

Today's story is about a mysterious person known as an asset manager.

 

As we know, to the bank that owns it, a foreclosed home is a giant liability.  However in a classic example of doublespeak the industry insists on calling these properties "assets" and, therefore, the people and organizations that have the responsibility for getting rid of them are called asset managers.

 

This is where the system gets a little complicated and where bureaucracy begins to raise it's head.  Most banks don't know too much about selling real estate and certainly don't want to get directly involved.  A lot of them are actually out of business which can make it really tricky.

 

Now lets' imagine that a given bank has 800 properties it needs to dispose of in Florida.  Now that might seem like a lot till you know that Florida has 69 counties with a total of over 400 municipalities.  That represents and average of about 2 per city, which multiplied over 50 states can start to be a bit of a logistical nightmare.

 

Enter the asset managers.  Their niche is to find local Real Estate agents in every nook and cranny who are 'willing' to take on the job.  Actually, every Real Estate office is full of agents falling over themselves trying to be the preferred REO agent for their particular neighborhood, but that's a whole other story.

 

So, the asset managers business is acting as the middleman between the sellers (usually the big banks) and the local agents at the sharp end who help prepare the properties for sale and will eventually list and sell the property on their behalf.

 

By now you can probably figure out that when you employ me to help you buy a Bank Owned Bargain, instructing me to ask the seller what they'll take "to make a deal" may not be very realistic.  In case it's not obvious I'll spell it out.

 

The Listing (sellers) agent had to do all sorts of free work, mostly doing Broker Price Opinions (BPOs) just to get the listing in the first place.  They are still doing loads of free stuff, like arranging for locksmiths, attending evictions, turning on electricity and filling out endless reports.  They also live in fear of offending the asset managers, most of whom they have great difficulty getting hold of anyway.

 

The majority of asset managers are clerks sitting in front of computer screens, sometimes in faraway places like India or Brazil.  They do what the computer tells them to, and often freeze if they have to step outside of the routine.  They are managing hundreds of assets spread over the country and have no interest in helping you get the best deal.  They also live in  fear of upsetting the front line seller's reps.

 

The first point of contact in the banks organization are also clerks sitting in front of computers.  When they get your offer on a property they are told by the computer what to do.  They have no clue what the bank is prepared to accept.  The computer will either accept (not usually), reject or counter any offer that comes in.  Often there is a grey area in which the offer has to be referred up to "management".  I have a sneaky feeling there are multiple levels in which marginal offers are referred to "senior management", then more senior management, and finally to the Grand Poobah, before a final judgement can be reached.

 

Sometimes people ask me should we take pictures of the condition of the property, do market surveys of recent sales, or send pictures of the buyers kids, in the hope of swinging a better deal.  It's a waste of time because the listing agent already did that stuff ad nauseam and isn't about pass any of your input along.

 

In case you're wondering I know all this stuff because I was an REO agent for a while.  Asset managers are no fun, and they work you death and pay as little as possible. However they perform a vital function and like the poor and foreclosed will always be with us.

You can't steal in slow motion.

Almost every one who calls me these days tells me they want a bargain, and I spend a large proportion of my time seeking out those great deals that you all want.

So sometimes it comes of a bit of a surprise when someone says to me, “I really liked that listing you sent me a couple of days ago, maybe we could look at some time next week“.  This is what I call stealing in slow motion and it doesn’t work.

In today’s world of 24 hour news cycles, the internets and Google, everything happens faster, and information is universal.  I wish I could tell you I’m the only one who knows about these bargains, and I do find out faster than most, but unfortunately these are not secrets.

Bank Owned properties are always posted on the Multiple Listing Service (MLS).  There are no secret lists, or hidden agendas.  They want everyone to know.

Here’s the way it works.  The banks are continually reducing the prices on their properties so they can reduce their inventories.  After about 2/3 weeks the first reductions are posted.  The MLS computer system will, if I ask it, send you, along with many others who may be interested, an instant  notification of price changes.  If you think you might want to make an offer the time for action is NOW.

It takes less than 24 hours for the first offers to be submitted and generally the listing agents wait another 24/26 hours before sending them all to the seller.  After that it’s too late.

Of course it may be that the price didn’t get “in the zone” so maybe there won’t be an offer so you can wait to the next cycle.  Here’s another thing you can do especially if you are an investor and are simply looking for bargains.

When a property first comes on the market, do your due diligence and figure out what you are willing to pay, and then stick to that number.  If you give me authority I can submit the offer and then resubmit it every time the price is reduced.   The traditional method of submitting a very low offer to stun the seller and then inching it up until they finally crack doesn’t work.

Check out the message I already posted about "Highest and Best".

So there it is.  Decide how much you are willing to pay for a property, stick with it, and keep resubmitting till it sells.  And do this on lots of properties.
 

Please don't ask what your competition is offering.

This message could also be headed.

 

You don't want me to tell you what your competition is bidding.

I bet your first reaction to this statement is, hell yes, I want to know what the other guy’s offer is, and I can certainly understand your point of view. But stop and think for a second.

If I was the type of agent that would tell you, what Joe’s offer is, don’t you think there’s a good chance, I’m going to tell Joe what you offered. And you wouldn’t want that would you.

 Here are the rules. As a real estate agent in Florida today, I work for everybody involved in the transaction. The technical term is Transaction Broker. So while I am certainly on your side as far as helping you get the best possible deal, there are some important rules I cannot and will not violate.

Basically if you tell me that you are offering $X at the moment, but you are willing to go to $X+Y, I cannot pass that on to the seller, or to any one else, UNLESS you give me permission. In the old days most Realtors worked for the seller (because they were the ones paying), and that kind of intelligence was passed on to the seller.

The very first home I bought in Florida, a few weeks after we arrived here, was purchased as foreclosure from a bank. We made what I thought was a very fair offer, but let it slip to the agent that we would be willing to go a little higher . Guess how much we ended paying in the end.

Anyway those days are changed, and now it’s a more level playing field.

However please remember that if you get in a situation where you’re told that you are competing with another buyer, I won’t tell you what the other offers are. Most of the time I can’t because I don’t know, but even if I do I ain’t telling, so please don’t ask.
 

What is meant by Highest and Best.

Sooner or later if you are making offers on Bank Owned property you are going to hear the words “Highest and Best”.

 

Highest and Best is code for “the seller has another offer on the table and now they want you to compete, to see who is willing to pay the most”. What you do next depends on how much you want the house and why.

If you are an investor and you are in business to make money, you should already have calculated how much you are willing to pay for the property. Now is the time to make an offer at that figure, and you should not budge from it. At this time there is so much property around that you should not go above your predetermined parameters.

If you are not succeeding in buying it is generally because you are not making enough offers, not because the offers are to low. If you are making offers and getting no counters, then probably is because you are bidding too low too early, and the seller is not ready to deal.

If you are an “end user” your choice is more difficult. If you are a first time buyer, and already making huge compromises so you can get in the market, you are probably competing with the investors, and they are likely counting every penny. Also there is a lot of first time buyer property around, so don’t go crazy.

If however you are looking at a second or replacement home and you think you’ve found a steal, then you are probably right, particularly if the property is new on the market or they just reduced the price, or particularly if it’s been off the market and was just restored. If you really want the home you may need to consider an offer at the asking price or maybe a tick above it.

So here’s how it works. First a little recap on the basic negotiating process. The basic details of your initial offer is keyed into a website by one of the agents involved in the transaction. After a period of time which is generally 24 – 48 hours, the banks agent (asset manager) reviews your offer and if you are close enough to be taken seriously, sends back a counter offer. There is ALWAYS a counter offer, which legally takes your offer off the table and removes any and all liability you might have

The counter offer ALWAYS consists of a bank addendum which becomes part of the state contract you originally signed. They may change the terms and conditions, in which case it is a genuine counter, or they may simply restate them.  In any case you have at least 48 hours (often more) in which to review the mound of paperwork they send you and return it to them.

Once the contract package is returned, it then goes to “management” to be reviewed and signed off, which again might take another 48 hours.

If you add up all the time you can see that a week can easily go by from your initial offer to an executed contract. If at any point during this process another offer comes in, whether or not it is better than yours, the bank has the option to stop and call for “Highest and Best”. They usually give a deadline of about another 48 hours, for everyone to give it their best shot.

Once the deadline is passed they will consider all the offers, and then make a counter to the one they consider their best. If it’s not yours then you wait for a while, if they can’t work it out with number one they might come back to yours. You also need to understand their preference, because they may not take the highest dollar offer. 

These are their preferences.

1 All cash no contingencies, for inspection or anything.
2 Cash plus hard equity, with no contingencies.
3 Cash and Hard Equity with right to inspect.
4 Low Loan to Value conventional , right to inspect, no cash back.
5 High Loan to Value conventional, right to inspect, no cash back
6 High Loan to Value conventional, right to inspect, cash back at closing
7 High Loan to Value FHA/VA, right to inspect no cash back.
8 High Loan to Value FHA/VA, right to inspect, cash back, down payment assistance.

You can probably figure out that they are more interested in the probability of the property actually closing that how much cash they will clear, although that is also a factor.

In summary Highest and Best means you are competing with at least one other buyer, so the seller is holding most of the cards. Make your best offer and wait with fingers crossed. If you don’t get that one there are plenty more fish in the sea.
 

You must have your "ducks in a row".

This probably applies to any Real Estate purchase but it is certainly very true if you are going to buy Bank Owned.  Before you start to make offers you have to make sure you have your ducks in a row before you start shooting.  In other words you have to make sure you are ready.

 

I've lost count of the number of properties we've lost because the buyer wasn't ready.  Here's what you need to do make sure you are ready.

 

First and foremost if you plan to buy from a bank you are going to have to "show me (and the bank) the money". 

 

If you plan to finance you need to have a RECENT PRE APPROVAL from a recognized lender.  This does not mean a pre qualification which is different.

 

In the good old days you could call Joe Lender and ask.  "Can you get me a loan".  Joe would often apply the mirror test.  Breath on this mirror and if it goes cloudy you're good to go.  Joe's more thorough brother might go further and ask if you have a job and did you default on any loans recently, and how much do you want to borrow.

 

Those days are long gone.  Today because of all the recent history (Google mortgage meltdown to find out what I'm talking about) they are going to make you jump through a few hoops.  They will definitely want to see your credit report, paystubs, bank statements and loads more stuff.  They will also likely want to see your tax returns and make you sign 4506T form which lets them pull your actual return from the IRS to make sure you didn't do a cut and paste job on it.  You'll also have to tell them your life story by filling out a mortgage application.

 

It make take a couple of days, but eventually, if all is well, you will be pre approved.

 

Now if you plan to pay by cash it's a little simpler, provided you can produce a bank statement that says you have the money in the bank and you can prove its yours to spend.

 

Bottom line is that if you can't prove you can buy the property to me, I'm not going to submit your offer.

 

Next, if you plan to inspect the property (which you definitely should) before purchasing, you need to get the inspector lined up first.  Once the bank eventually accepts the offer, they will push to get it closed as fast as possible, and one of the conditions they are likely to impose is a shortening of the inspection period.  Identify who your inspector will be and warn them they have a job coming.  That way they can get out, quickly, and you will have time to make a decision before the inspection period runs out.  Remember that the banks generally will not negotiate on inspections, it's take it or leave it, and that your deposit may be at risk if you don't cancel in writing before the end of the inspection period. 

 

And speaking of deposit money.  You need to have access to the cash for an initial deposit.  Once they accept an offer, they want the deposit in escrow RIGHT NOW!  We're really supposed to put the deposit in escrow when we make the offer but because so many offers go nowhere, it's become custom and practice to make the deposit after the offer is accepted.  If you can't get the money to them almost immediately, usually by wire transfer, that might just be enough for them to pull the deal and sell it someone else.

 

Finally you need to be ready to close quickly.  The banks do not allow any kind of contingency on the contract such as the need to sell an existing home, or "I'm waiting to hit the Lotto".  You must be ready to close as soon as the inspections are complete 

Why it's important to make offers!

This may seem obvious as a starting point but if you want to buy a Bank Owned Bargain, either as an investor or as a an owner occupier, you have to make offers.  More accurately you need to make offers, in writing, in the proper format.

You should be aware that with Bank Owned properties there is very little risk associated in making an initial offer, but it is also very important that you avoid making frivolous offers, “just to see what happens”.  I will advise you if your offer has no chance, although I have to submit it if you insist

Most importantly you don’t have any money at risk.  For some time now we have consistently been making offers with no money on the table.  We do not put any money in Escrow until later in the process.  You do have to demonstrate you have the ability to buy either by offering proof of funds or a solid mortgage pre approval.

The banks NEVER accept an offer outright but ALWAYS send a counteroffer.  Even if they accept the price you offer , they will rewrite the contract into their own format (addendum), and send it back for signature.    They will often change something, such as the Escrow deposit amount, the inspection period or the closing date.  Even if they don’t the fact that they send more paperwork constitutes a counter.  At that point your original offer is replaced with a counter that you don’t have to accept.    If you don’t want to go forward, all you have to do is wait past the acceptance date and the contract is voided.

In the last few years I’ve lost count of the number of offers I’ve submitted on Bank Owned properties.  Every one is different and you have to make sure you have all the paperwork correct and that it goes to the right place and most importantly you have to FOLLOW UP.   Otherwise you may sit for a couple of weeks waiting for a response to an offer that never got past the listing agent.

When we write an offer it is done on an ASIS format.  This means that you have the right to inspect the property, after the price is agreed and reject it without penalty, if the inspection is not to your liking.  A professional inspector will always find something to comment on, so you always have an out.  Again let’s not make frivolous offers and then use the inspection report as a cheap out.  The sellers will quickly get to know you (it’s a surprisingly small community) so my reputation suffers, and your offers get ignored.

Usually you can hold off sending the escrow until after the inspections are completed.  The title company can’t open a file to accept the money till they have an executed contract, and that often doesn’t happen for several days.  Get the inspections done fast and if it needs too much work bow out briefly.

Our current experience, and we have plenty of it is that only about 10% of offers get accepted, so you can’t hang back.  Any property worth buying is likely to have multiple offers.  However if you do get one accepted, and then decide you don’t want to go forward for whatever reason there are a number of ways to get out.  Remember the banks have lots of buyers for these properties so if you are not committed they’ll move on fast.

If you are looking to buy a Bank Owned Bargain, nothing is going to happen until you start to make offers