Who should NOT buy a short sale.

Just following up on the previous post.  There are some people who should simply not consider buying a short sale.  If you fall into one of these categories short sales are probably not for you.

 

1   You have limited time or you need to close by a specific date.  Short sales are notorious for not adhering to time frames.  Sometimes they go fairly quickly but often the sale will drag on for months and months or fall flat at the last moment.

 

2   If you need to know exactly what the price will be.  The price on a short sale is determined by the bank, not the buyer or the seller or the appraiser.  If you don't have the ability to be flexible about the price then don't go there.

 

3   If you don't like uncertainty.  There is nothing certain about a short sale.  All kinds of things can change especially in the last couple of weeks.  Real Estate purchase has a lot of variables to begin with, but a short sale adds several new dimensions.

 

4   If you have alternatives.  If you can find a property that meets your requirements and is not a short sale then go for that and don't mess with the short sale. 

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.