Real Estate Market

Archive for the ‘Foreclosure’ Category

So you wanna buy pre-foreclosures? or at the courthouse steps? So many people ask us about this. Here’s our ’30 second seminar’ on it. If you’re going to buy Pre-foreclosures–after the seller is behind on her payments, but before the lender’s auction date-then there are some pros and cons to consider.

Pros:
1) you’ve got a good possibility of buying the house subject-to the loan from a very motivated seller who just wants out.

2) you don’t need to do any marketing, just read the foreclosure notices (more on this later), pull some comps and do drive-bys.

3) There are several *thousand* foreclosures published each month, in the greater Atlanta area-plenty to choose from.

Cons:
1) You’ve only got about 3 weeks (to beat the courthouse auction) to contact homeowners and get signed contracts, title work, funding, etc.

2) Most pre-foreclosure homeowners are in denial about their situation and/or mad at the world due to all their stress and debt collection calls they get. So, they’re usually not very open or friendly to you and your offer.

3) Most really good deals are redeemed (caught up) by the homeowner, and the foreclosure cancelled, just before the courthouse auction.

Say you decide to jump in and “Play the Pre-Foreclosure Game”. Consider doing a lot of bold, cut through the clutter mailings to the pre-foreclosures you’re considering, to get their attention and have them call you. Remember, their mailbox and answering machine is filled with debt collection stuff. You need to stand out, and hit them often. You might want to mail a different neon postcard or lumpy mail (trash can, stick of dynamite, handcuffs, etc.) *every few days*, until they’ve grown to like you or are curious enough to call you.

If you choose to skip pre-foreclosure and actually buy foreclosures at the courthouse steps-then you’re dealing with the foreclosing attorney and the lender, not the homeowner. The biggest things to keep in mind is you’re expected to pay all cash by the end of the auction day; you’ll have to run your own title exam in advance; and you’ll probably have to guess what condition of home interior is since homeowner may not have let you inside. Another option is to buy the note/mortgage for cash at a deep discount, direct from the lender, prior to the courthouse auction. You don’t have to deal with the homeowner that way, but you do have to have access to funds, and you will still have to do your own foreclosure after you buy the mortgage.

As I wrote in my article, Can the Government Solve the Foreclosure Problem, the state and federal governments are considering using taxpayer money to bail out people in foreclosure. Is this a good or bad idea?

At first blush, it appears awfully unfair, in that the government would take your money and give it to someone who made an irresponsible financial decision and would thus profit from it. On the other hand, one could argue that the government’s lack of regulation on loans, in part, led to the problem.

From a purely capitalist, free-market position, I’d say, “Absolutely not – let the market correct itself and allow economic darwinism take its course”. From a sympathetic standpoint, what’s $300 million in the scheme of things, since most of it would go to HUD counseling agencies to help poor people refi and keep their homes?

Despite the animosity from people who object to paying for this “robin hood” program, it would help everyone, since less foreclosures helps keep your neighborhood home values up. However, the harsh reality is that $300 million wouldn’t change anything, and like most government programs, it would be nothing more than lip service and bureaucracy.

Nobody wants to see low income families on the street, but it is a bad precedent for the government to have too many programs to bail consumers out of bad financial decisions. True, some of the lenders are to blame, but they are already being punished in their pocketbooks. Many lenders who originated and sold these loans are now having to buy them back from the investors they sold them to.

As a final note, most states do not have extensive regulation of the mortgage broker profession. I am not much for excessive government anything, but having a sufficient fund to reimburse the victims of the worst predatory lending would be a good idea. Real estate brokers, attorneys, and other professionals pay into a fund managed by the state for the protection of clients that are scammed, and so should mortgage brokers. In my own state of Colorado, mortgage brokers have to carry a small bond, which is almost a joke. California, on the other hand, requires a mortgage broker to first be licensed as a real estate broker, which I think is a good idea.

Many of the properties that you come across will have two mortgages with two separate banks. If you are just getting started, I strongly recommend that you target properties with single mortgages. Negotiating one mortgage is always easier because a second mortgage means that you are now responsible for negotiating two short sales instead of one. However, if finding homeowners who only have a single mortgage is not a realistic option, you must be prepared to successfully discount two properties.

The first thing you will need to know is that in the event of a foreclosure, the bank who holds the 1st mortgage is considered the primary lien holder and will always receive the proceeds from the sale. If there is a second or third mortgage on the property these banks are considered secondary lien holders and will not receive anything from the sale.

With that being said, your negotiating power is much greater when attempting a short sale on a second mortgage. If the secondary lien holder is made aware of an upcoming foreclosure and you make it clear to them that the primary lien holder has already accepted a short sale the ball is now in their court to decide whether they are willing to accept a discounted payoff to salvage something from the mortgage instead of possibly receiving nothing. The reason I say “possibly receiving nothing” is because it is also possible that once the secondary lien holder realizes that the primary lien holder has accepted a short sale they may attempt to go behind your back and negotiate their own deal with the primary and cut you out of the transaction. To help avoid any unethical business practices do not reveal who the other mortgage company is, just provide the necessary proof that a short sale has been accepted by the primary lien holder and begin your negotiating from that point.

The second thing you need to do is compile a list of all of the reasons why the lender may consider your discounted offer. You will want to particularly make a note of any repairs, decrease in property value, other foreclosures in the area, crime and vandalism, and slow or no market activity. At this time you can also prepare a hardship letter for the homeowner to help justify the short sale.

Next make copies of the homeowners W-2, tax returns, bank statements, and pay stubs. There is a chance that the lender will not ask for these documents since they are the secondary lien holder. However, they may ask for a copy of your acceptance letter that you received from the 1st lien holder along with a sales agreement and net sheet. If you have an acceptance letter from the 1st lien holder you can fax it to the 2nd lien holder as proof but be sure to white out the name of the lender, the discount amount, and any other information throughout the document that may disclose who the 1st mortgage holder is and how much was accepted. Although the 2nd lien holder will request and often demand to know the exact payoff, do your best to keep this information confidential. Let the lien holder know that you respect the homeowner and the 1st lien holder and it would be unethical to disclose personal information. The lender often will understand and appreciate your business ethics and not push the issue. Other times they will be very firm on their requests and it will be your job to be creative enough to give them what they want and still not put yourself in a compromising position by sharing the wrong information.

If you have not received your acceptance letter from the 1st lien holder, prepare an alternate letter stating that you have verbally received acceptance of the short sale along with the estimated date that the deal will be closed. Sometimes a letter like this will be sufficient but if it doesn’t you may be forced to come up with an actual acceptance letter.

Even if you have an acceptance letter it is still a good idea to send a personalized offer letter along with you proposal.

Lastly, you will now need to prepare your sales contract and net sheet. You will write up the contract the same way you did for the first mortgage the only difference is that the total percentage of your discount will be significantly higher. With the first mortgage you will want to discount the mortgage 30-50%. However, with the second mortgage you will only want to offer a small percentage of what is owed. For example, if the second mortgage has a total balance of $35,000 you will only want to offer $1,000. As a rule I start my offer around 3% of the total balance and work my way up from there if necessary. A large percentage of my deals with second mortgages are accepted on the first offer. If the bank rejects my offer I counter by increasing my original offer by 1-2%.

Example:
$40,000 (second mortgage balance) X 3% = $1,200 initial offer
$40,000 (second mortgage balance) X 5% = $2,000 counteroffer offer

It is possible that both the 1st and 2nd mortgage can have similar balances. If this is the case the same strategy will apply. The only difference will be the amount that each lien holder receives from the short sale.

At first it may be hard to grasp the concept that the 2nd lien holder would accept such a small amount to release their mortgage. The reason they are typically open to making a deal is because being in a secondary lien holder position is always risky. Since a foreclosure basically assures that they will get nothing, the lender is usually motivated to try and salvage something out of their investment and will strongly consider accepting a short sale.

Have someone else do it for you.

Short sales get dealt with just like everything else in my life that even remotely smells like stressful labor; they get delegated. Outsourced. Sub’d out. Avoided at all cost. The purpose of this article is to encourage you to do the same.

Life is too short to do things you hate. Don’t you feel the same way? Did you know you don’t have to do things you don’t like? You are not a prisoner. You’re free. I spent ten years of my life doing what the world considers “real” work. I’m done. Real work blows. Who is to say what is real and what isn’t anyways?

“Reality is an illusion.
Albeit, a persistent one.”

- Albert Einstein

Something wonderful clicked inside my head a few years back after my dangerous escape from Cubic-Hell. It’s weird because it just evolved kind of naturally. The only way I can describe it is a complete 100% aversion to doing anything at all that I don’t find enjoyable…and the ability to actually get away with it.

How to outsource all your unwanted “duties” in life is the topic of another article. Let’s focus on the subject of short sales for now.

Let me give you an insider look at a typical transaction
on a typical day in my most non-typical life:

One of my student’s cell phone rings (I do all my work with students now. I don’t have time for any of my own marketing anymore). Ring! They answer and take down some brief information about the situation and email the lead over to me. I take a look at it and we fax over an offer without seeing the property. The seller accepts it and faxes it back. We send out an email advertising the property for $10,000-$50,000 more than we put it under contract for. Someone calls me and buys it. Title company sends us a check. 17 minutes work total. I never left Starbucks. Tough life; I know.

Now let me give you an insider look at a typical short sale transaction.
Thank God I do not know this from personal experience:

You’re in an office that resembles the office scene in The Matrix where everything is grayish green and weird and lame. The phone rings, but this time is sounds a little more eery for some reason. It rings in slow motion. Rrrrrrrrrrrriiiiiiiiiiiiiiiiiiinnggg. Like it’s the scary guy from the movie Scream calling and you know it. You sense impending manual labor in your near future, and some sick part of you is wondering if you murder yourself violently is there any way you can still go to heaven (probably not).

The lady on the other end is hysterical. She’s losing the house to auction in two weeks and she needs you to close tomorrow with cash. Your worst nightmares are confirmed; you are indeed about to do alot of work that you hate. You wish it would’ve been the Scream guy calling instead and that he would stalk you down and end your misery quickly.

You spend the next hour on the phone going over all of her options with her. You’re trying to nudge her in the direction of allowing you to do a short sale. By the way, for those of you who may not know, a short sale is nothing more than going directly to the seller’s bank and offering them less than the amount of the loan. She finally agrees to see you in person.

You drive an hour and a half to the seller’s house. You’ve brought a notary with you because her signature on the deed transfer has to be notarized (so far as I recall). That’s real convenient. You don’t even like your notary. The drive over is awkward. You spend three and a half hours listening to the seller’s genuinely sad story before talking her into giving you the deed to her house. You leave depressed for the next 3 weeks.

Now the real fun begins. You submit the short sale package to the bank and wait about…a month. In the meantime you meet the bank’s appraiser back out at the house (hour and a half drive) and attempt to use every NLP Jedi mind trick you know of to influence his appraisal. It’s a $400,000 house on a golf course, but because you’ve gone through Jeff Kaller’s course and know what to say, the appraisal comes back at $99,000.

I failed to mention that during this whole time you have also been attempting to market the property to a suitable buyer. To this end, you have physically fixed the house up (ew), given it to a realtor to list (double “ew”), and some other stuff that I’m sure I’m forgetting but will remember later after it’s too late. Why are you doing this all in advance when the short sale hasn’t (and may never) even been approved? Because you have to be ready to move at the speed of light once that short sale is approved. You’ll have 30 days. That’s it. Use it or lose it.

So the stars align, you find your buyer, and the bank approves the short sale. Happens all the time. Top notch short sale investors make a boat load of money; don’t get me wrong. They just work 90 hours a week is all. And as we all are well aware of by now…that’s against my religion.

Now, you just sit back and wait for the closing date. Simply stay on top of the buyer. Make sure his loan goes through, he closes, and you don’t lose the house back to the bank.. Well, in this case – it doesn’t, he doesn’t, and you do (lose the house that is). Just happened to a friend of mine yesterday. Bummer. Do 10-30 houses at once, simultaneously, non-stop, and at all times of life, and a decent number of them will actually go through. Welcome to paradise. Total time spent – 2 months.

Which Would You Rather Have?
17 Minutes in Starbucks?…Or 2 Months In Hell?

Ah, but alas – we are not forced to answer such limiting questions as these because we do not dwell in the parched land of “either-or” thinking! We live in the Promised Land of abundance where “both-and” is the only way to fly. We needn’t limit ourselves. We can have both the luxury of Starbucks and the fruits of the hellacious labor…without doing the labor!

“Preston, please tell me how to have the luxury
of Starbucks and the fruits of the helacious labor.”

Ok. You do it by spending your time doing what you find enjoyable while outsourcing everything else. In this case, you are outsourcing your short sales. There are two ways to go about doing this. You can either find a company that will do nothing more than process your short sale with the bank and hand it back to you or you can find someone who will do absolutely everything (and I mean everything). In the case of the former, you are paying these people about 35% of the total profit while doing a lot of work still. In the case of the latter, you are getting a 25% finders fee (usually) and doing absolutely nothing but emailing leads over.

Guess which one I do. Yeah, that shouldn’t be hard right? I take 25% and do nothing. Currently I have thirty five deals in with my short sale guy. I have no idea where he’s at with any of them and frankly I’m not overly concerned. I simply get checks from him every week due to deals closing that I have nothing to do with. Free money as far as I’m concerned.

If you want the situation I have, you are going to have to look around and find someone reliable who knows what the heck they are doing. This will take some time. The guy I use is the best in Florida hands down. He has buyers lined up waiting for all these deals to clear with the bank. It’s awesome.

Anyone actively investing in foreclosed and distressed properties has no doubt come across one major problem… Finding deals with equity! Trust us, this is a nationwide problem.

There are so many foreclosures out there; unfortunately most of the homeowners owe what their property is worth. We find that most investors walk away from deals with no equity. They either don’t know what to do with a no-equity deal or they are unwilling to put forth the effort necessary to make the deal work. In situations like this, we SHORT SALE the mortgage.

“What is a short sale?” You ask. To short sale a mortgage means getting the bank to accept less than is what is owed as payment in full. There are several steps that will ensure your success when short selling mortgages.

First of all, you must have the homeowner under control. Many investors are under the misconception that they can buy the property directly from the bank while it is in the foreclosure process. Not true! The bank does not own the property until the moment of the courthouse sale. You can buy the mortgage and finish the foreclosure process, but you cannot buy the property. You’ll have to work hand-in-hand with the homeowner if you plan to short sale mortgages.

Here is how it works: A homeowner calls you and talleys he is in foreclosure; owes $95,000 on his property; it’s worth $100,000 and he is 8 months in arrears. He wants to move on with his life but can’t sell his house because he owes what it is worth. Here is where you come to the rescue. You meet with the homeowner and have him sign an “Authorization to Release” form (this gives the bank permission to speak with you about the account) and a sales contract for the amount you are willing to pay for his property. In this scenario we are going to offer $50,000.

Next, you call the bank and ask for the Loss Mitigation Department. This is the department that handles properties that are in foreclosure. Tell the person handling the account that you are trying to help Mr. Smith with his foreclosure and you are willing to buy the property from him. However, due to its poor condition you are only willing to pay $50,000 as payment in full. Fax the sales contract for $50,000; comps in the area; an extensive list of repairs that are needed to bring the property up to marketable condition; a net sheet (a title company will help you with this); and some really bad pictures. The bank will then review the information and make a decision. Let’s say they counter at $65,000; you counter again at $55,000; they accept! It’s that simple! We short sale many, many mortgages every year. Banks are not in the business of owning properties. They would rather short sale a mortgage than go to the courthouse steps.

We’d like to share an incredible deal one of our Foreclosure Fortune Hunt graduates put together. Her name is Cathi Dubois. Cathi was helping some friends find a home in which they would live. They came across a property valued at $200,000 in a distress situation. The property had a mortgage of approximately $197,000 and was in need of several thousand dollars of repairs. Based on the fact that the current owner owed what the property was worth Cathi did what any prudent investor would do, she did a successful short sale. She contacted the bank and began the process. Her first offer was $50,000. The bank laughed and told her to make a higher offer. After several phone calls, the bank agreed to accept $130,000 as payment in full. That is a $67,000 short sale! With the new payoff of $130,000, she then wholesaled the property to her friends for $140,000 and made a smooth $10,000 in less than a week!!!

Personally, we think she gave the property away too cheap (smile). This is a typical case where having a firm grasp on creative real estate enabled Cathi to turn a “nothing deal” into a “something deal” just by picking up the phone. She made money (and a lot of it) on a deal most investors would have passed by. The bank was happy with the short sale, Cathi made $10,000, and her friends bought a home with $60,000 equity!

So… the next time you get a call from a distressed homeowner with no equity, what will you do? Walk away or make a few simple calls and turn your time into cash? We certainly hope you will make the small effort it takes to short sale the mortgage. It is such an easy way to make money in an industry where great deals are tough to come by. When you short sale a mortgage, not only are you helping yourself; you are helping a very distressed homeowner and giving them the chance to start over. One can never go wrong when win/win is the solution.

I know what you are thinking… “The title of this article does not make sense. How can you leave a place before you ever even arrive?” Please allow me to take the next few moments to discuss how exiting before entering is not only possible but should be considered as the single most important aspect of a short sale transaction.

The motivation to write this article came from the countless amount of feedback that we have received from our students regarding Short Sale Exit Strategies. I will soon make available more detailed information on specific exit strategies. These will be methods that I strongly suggest you follow depending on your individual geographical market and more importantly your realistic goals and expectations.

For now, what I’m about to share is focused on the importance of making sure that your exit strategy is formulated before you begin the negotiation process. It is counter-productive to do it any other way. Let me explain.

1. The main reason is although your goal is to make a profit, you should always consider the fact that the homeowner is putting a part of their well being in your hands. You do have a moral requirement when doing short sales. The last thing you want to do is put an individual or family in a risky or uncompromising position. Suppose you don’t close the deal? Who does it affect more? Therefore, it’s extremely essential that you have a game plan before you assume that type of responsibility.

2. The next reason is that once you have the acceptance letter in your hands you will be working with a limited amount of time. You will want to spend your time working on your next deal or preparing the house for sale or rent, not putting together your exit strategy. Be proactive not reactive.

3. Lastly, if you determine what your exit strategy will be ahead of time and begin putting it together you are more likely to close your deal for maximum profit within a timely fashion (45 days max.). It’s always possible that the deal falls through your hands because of lack of preparation.

All three of these reasons help to justify the importance of a well thought out plan. What’s the purpose of getting the acceptance letter if you can’t close?

I also want to remind you that you are not allowed to assign a short sale. So if you expect to negotiate the deal and then pass it on to another investor don’t waste your time. It will always be stated on your acceptance that the agreement is not transferable or assignable, therefore you must come up with another option if you want to do a quick sale of the property. I’ve shared a few creative ideas related to quick sales or flips that has worked for a select few individual investors. I’ll also be sharing these ideas with you in the near future.

Too many times investors make the mistake of going through the entire negotiating process without even considering what the possible options are for the property. I emphasize the “s” because one of the major benefits of exiting before entering is that you will often come up with multiple exit strategies. You increase the chances of having more than one way to profit from your hard work.

I personally feel that it gives me more of an edge as I begin my discussions with the lender. I also gain a better understanding of my earning potential because I’ve taken the time to estimate the numbers based on what exit strategy I’m using. All exit strategies do not breed the same amount of return. Consequently, you may find that although it is possible for you to negotiate the short sale it may not be a deal worth pursuing. There may not be enough profit on the table once you exit or the deal is just too risky for you to invest in.

Those of you who are attempting multiple short sales at a time will especially find that exiting before entering will help to ensure that all of your deals are prioritized and that your time is always spent on the deals that will close the fastest and yield the most profit. There are multiple facets to short sale exit strategies and it would be impossible to address all areas in this one article. However, we will continue to share information, strategies, and techniques that will open the door to many more discussions and helpful articles. Until next time.

Foreclosure lists are a great resource for finding motivated sellers, but the competition for these deals is substantial. People in foreclosure are inundated with mailers and calls, so the investor who can answer the seller’s questions and make him feel good will likely get the seller’s trust and ultimately the deal.

Every investor needs a script, that is, a pre-defined set of words to respond to a seller’s common objections. All good sales people work from scripts, and everyone has a script already in their head. Remember, a script is nothing other than a predefined set of words in response to a question or situation. So, if you don’t refine your script, the default one in your head will take over, and often lead to saying the wrong things!

Here are some of the things from our script I teach :

Objection: Another Investor Said That They Would Give Us $5,000.00

Counter Objection: “Really? I’d take that offer in a heartbeat if I were you! But, here’s the thing… based on my experience, I’m not sure how another investor can promise you $5,000.00 if they haven’t spoken with the bank and haven’t received a commitment letter from your lender yet, so that tells me that this other investor may be just telling you what you want to hear. Is that possible, Mr. Seller? Here’s a tip, Mr. Seller – ask the other investor to sign a $5,000 promissory note for the money, due at closing. If he won’t sign the promissory note, then you will be able to know how trustworthy he is, does this make sense? I can’t promise you any money right now because I honestly don’t know what I can work out on this until we meet, review your details and I speak with your lender. Regardless of whether or not you’d want to work with us, do you think you should be working with someone who will be honest with you and not ‘sugarcoat’ it? Are you with me?”

Objection: I Want To Be Able To Stay In The House

Counter Objection: “I understand you don’t want to move, it’s a very difficult thing. Unfortunately, if we purchase the house, we can’t rent the house back to you and I would be careful of an investor that says they will do that because there have been some shady practices where that’s concerned. The good news is that virtually every seller we’ve worked with is actually really relieved when they get out from under the house. For the amount of mortgage payments you are making each month, you can practically rent a palace for that! It is such a renters market, that I think you’ll be really pleased to see the great houses/condos available to you at a fraction of what you’re paying now. I can give you a website where you can find great rentals in your area at a price you can afford. The bottom line is that I think you’ll feel a lot better just putting this whole situation behind you and getting a fresh start in another home. Does this make sense?”

Objection: I Have A Friend Who Is a Realtor Who May Help Me

Counter Objection: “Basically most realtors don’t do short sales which can be a real detriment to you and the most importantly the realtor has to wait until an offer comes in to submit to the lender, (if that offer comes in) whereas we put the offer in immediately and start negotiating with your lender right away”.

Objection: How Can I Trust You?

Counter Objection: “You are smart to be skeptical, Mr. Seller, and I would be if someone I didn’t know was knocking on my door or calling me on the phone. Unfortunately, nothing is 100% guaranteed and, but I can tell you that I’ve worked with (dozens/hundreds) of people just like you who are really glad that they had someone like me to work on their situation. The bottom line is you are going to have to ultimately choose someone who you can trust, right? You don’t have many options right now; if you don’t trust someone, your house will go into foreclosure and there won’t be any option left. So, let’s just go with the assumption for now that you trust me, and I trust you, then we’ll go forward, does this sound good?”

That’s the big question for many investors looking to buy foreclosures – Should I buy an REO (bank owned property) or a pre-foreclosure (still owned by borrower, but in default)? How you answer that question can determine how easy or how difficult a time you have with your foreclosure investment.

Most investors, your author included, feel that buying an REO (an acronym for real estate owned) is a cleaner deal. Typically you are assured of good title to the property including title insurance. That means that usually you don’t have to worry about the old borrower/owner coming back trying to claim the property under some sort of extended equity of redemption, old taxes or liens that were unpaid, or even old owners or tenants who refuse to move out. (You did make having the property vacant a contingency of your REO offer, didn’t you?!)

All of these problems can occur if you attempt to buy a property in pre-foreclosure.

On the other hand, the biggest complaint investors have about REOs is that there are no real REO bargains. Rather, the lenders have rejuvenated the properties and are trying to sell them for full market value through an agent. How’s an investor supposed to flip a property bought at full market value?

It’s just the opposite for pre-foreclosures. The assumption here is that that a pre-foreclosure can, indeed, be bought for far below market value. Just get the borrower to sign it over, refi and/or flip, and you’ve made a huge profit.

Thus, the conventional wisdom goes, an REO may be cleaner, but there are no bargains. A pre-foreclosure can be more complicated, but you can get a real steal. Maybe.

In my own experience I’ve found that the value of REOs is greatly underappreciated, while the bargain value of pre-foreclosures is often overestimated. Here are 4 important questions to ask to help you decide which is the better investment avenue for you:

1. Do You Have To Deal With The Lender?
Dealing with a lender, as investors with recent experience know, can be a real burden. With an REO, you obviously have to deal with the lender, since it owns the property. Many investors complain that lenders are so overwhelmed by the number of foreclosures they have, that they don’t have the staff or the time to talk or act.

That’s certainly been true, but most lenders are now ramping up and many will soon be up to speed. Their REO departments often are the fastest growing element of their business.

On the other hand, when you’re buying a pre-foreclosure, typically the borrowers/owners are underwater. That means that in order for them to sell, you’ll need to get the lender’s permission for a “short sale,” where the lender accepts less than the loan balance.

Thus regardless of whether it’s an REO or a pre-foreclosure, dealing with a lender is virtually a certainty.

2. Can I Get A Bargain?
When you negotiate in pre-foreclosure directly with a borrower/owner (and with a lender in a short sale), usually you’ve marked down the property so much that if the deal actually goes through, you’ve got a bargain. But, that’s a big IF. Keeping the borrower/owner interested in moving forward, getting timely action from the lender, and doing it all against the backdrop of the foreclosure timeline takes knowledge, skill, perseverance, and probably most of all, luck. There are many variables to control and too often nothing comes of a lot of work.

On the other hand, with an REO you’ve only got the lender to deal with, and there are no fixed timelines staring you in the face. The challenge here is to get to the lender early, before it fixes up and lists the property. Negotiate with the lender then, and you may get a bargain.

However, most investors I’ve talked with complain that they can’t find out who the lender actually is or get to the right person to talk to before the lender spends money on the property and lists it. They come in on the deal too late in the process.

My suggestion is to follow the foreclosure trail. Who buys the property at auction will lead to the lender who actually owns it (not some servicing company). And going to the top (even to the CFO) as well as restricting what you ask for (for example, you request REOs within a specific neighborhood or group of streets) can have better results.

3. Can I Get Good Financing?
Two years ago that wouldn’t even be a question. Today, it’s often the biggest. Can you line up financing on a foreclosure you want to buy?

You’re certainly on you own with a pre-foreclosure. Finding a lender who won’t simply shunt the property aside because of its foreclosure status can be a big hill to climb. And being an investor (non-owner-occupant) is sometimes a financing killer.

On the other hand, with an REO, you’ve got a captive lender – the owner. The lender that owns the REO wants to sell, knows that it can be hard to get outside financing, and usually has the wherewithal to handle the financing itself. So why go elsewhere? Make the purchase contingent on seller financing. (Sometimes you’ll even get a break on the terms, the points, and the interest rate!)

4. What About Fixing Up The Property?
Virtually all foreclosures, REOs and pre-foreclosures alike, need rejuvenation. Nationwide, lenders today are averaging $9,000 a property for this. That typically includes new windows and screens as needed, painting, basic landscaping, and new carpeting. Of course, that’s just the average. Many properties require far more costly fixing up.

Whether you buy a pre-foreclosure or an early (before fix-up) REO, this is money you’ll need to spend. So, there’s no saving here. Of course, you can get an REO that’s already been rejuvenated. But, as noted earlier, you’ll probably end up paying full market price.

So, what’s best, an REO or a pre-foreclosure? Obviously every deal is unique. Nonetheless, I still prefer REOs IF I can get them from the lender before it invests money in rejuvenating the property and listing it. For me, the hassles and unknowns of dealing with both a lender and a borrower/seller in a pre-foreclosure are just not worth the trouble required.

REO Properties, as I am sure you know, are properties that are owned by banks. The primary reason that they are owned by a lender is that they were foreclosed on and there were no bidders at the foreclosure sale, thus the lender took them back. VA/HUD Auction Properties are properties that had loans backed with VA or a HUD guarantee. Those loans were foreclosed on, with no successful bidder at foreclosure, and the property thus reverted back to the VA or to HUD.

Generally, the easier it is to find a deal, the higher the price you will pay. The great bulk of investors do not know how to find deals in the way that I do with the techniques that I teach in my course. They thus go after the properties that they can find—listed properties, REO properties (which are typically listed), and the VA/HUD Properties. Because so many people with limited experience and larger checkbooks can find these properties, the prices paid are too high to make any real money.

On REO properties, remember that the lender will typically bid at the sale for the amount they are owed plus interest, penalties, and legal fees. If there is equity in the property beyond this point, other bidders will bid above the lender’s opening bid until the bidding stops with a successful bid. REO properties are by their very definition lacking in equity. Otherwise, they would have been sold at the auction.

The sole exception to this might be if no one showed up at the auction, but in my market, as in most, there are plenty of people bidding at the sales. Most do not really understand what they are doing. They buy one property for too much money and are never heard from again. The next month, someone else steps into their shoes. This makes it tough to make a living at a foreclosure auction for real investors. We like the pre-foreclosures before the sale. Fewer people are willing to work on those even though there is much more profit in them.

Lenders now are showing an increased willingness to repair REO properties before putting them on the market. In past years, they would put a sign out in the yard after they took the property back. Typically the house needed work, scaring off owner-occupants, and leaving investors as the only buyers. It was possible to get a decent deal on a house like that. Now, lenders have found it to be a better move to go in and fix sheetrock, paint, and generally clean up the property. They can sell directly to owner-occupants and get a much better price on the property. Thus, many REOs are too pretty and nice to get the kind of price we want to get on them.

Even lenders who don’t fix are a little stubborn as well. They often get an appraisal on the property and price the property as if it were in better condition. Remember that they probably made a loan relatively recently on the property (hence there is no equity in the property), and they had an appraisal done at that time. The lender thinks that this appraisal was probably right, and will feel justified in asking for that amount or more. They will not entertain or accept any offer that is not near to their asking price. After months and months of not selling, lenders may come around and be willing to take less, but it takes time. Typically if you give a house enough time, a homeowner or the ignorant investor will come in and spend too much on the property before enough time elapses to pay what it is really worth.

Finally, on REOs that are actually priced well, your odds of getting them are very remote. Unlike dealing with private sellers, where I can make an offer today, and no whether or not this offer was accepted within 24 hours, lenders move VERY slowly. It may take two weeks or more to hear back from them. Everything decided by committee. And during that time, guess how many other investors have seen the property and made offers? Lots. And what are the odds that your offer will be the highest of all of those, when many investors are not afraid to overpay? Not great. Thus, even on the few good deals, the knowledgeable investor has the deck stacked against him or her.

The one exception to this is if you find a REO that is SO torn up that it scares away all of the new TV seminar graduates or doctors who decide to buy a couple of homes as an investment. However, these are fewer and farther between now that lenders are fixing up these properties themselves. Also, most REOs have recent loans, so the odds of the property falling apart since the loan are remote.

REO listings are often controlled by a relatively small number of agents in a given city. Thus if you are not in the loop, it is hard to hear about the good deals before the rest of the world does. If you ARE in the loop, and can find these “pocket listings,” there may be some potential in this area. However, subscribing to a list of REOs in your area, or waiting until a deal hits the MLS system is usually not a way to proceed and make money in this area. I typically thus advise against subscribing to such services, which have dated information at best. You are better to have a relationship with a Realtor to find REOs in your area if that is what you are interested in doing.

VA/HUD Properties are not the best deal in the world for most investors for similar reasons that the REOs are not. These basically are REO’s that are owned by HUD or the VA. Thus the same considerations apply, and we do not need to rehash those again.

The primary problem with these deals is that people buying these homes to personally live in them are able to bid on the property before investors are able to bid. Thus, the really good deals are picked off first at this stage. Many investors lie and say that they are going to buy for themselves, and later “change their mind.” I am not comfortable doing that, and do not believe in committing fraud to obtain houses. There are too many deals out there to move into these murky waters. If you are truly looking for a personal home, this is an area to check out, as once in a while a few homes are wildly mispriced. The scraps left to investors after the owner-occupants have had a chance to buy or pass are not worthwhile in my book.

A relative has an interesting strategy that he uses to buy these properties in Florida. He helps his kids (over 18) buy them in the town where they live and go to school. They live in the home for a year and resell. Enough is made on the homes to pay for the mortgage payments plus a little extra. On some, the properties are rehabbed after the kids move out, so more money is made. If you have college age kids, or will soon, this is an interesting strategy to think about. It is the only way that doing these types of houses makes sense to me.

I hope that this information has been helpful, and not too discouraging! I am asked my take on these subjects quite often, and I thought that every one would benefit from this info. I want to make sure that you spend your time looking for deals in the best fishing holes, and not where everyone else already has a line. I know that some people reading this will have done some good deals on REOs, and I do not doubt that there are some out there.

However, my goal is for you to spend your time working only the most lucrative markets, and not to spend time looking for deals where they are harder to find, and where there is much more competition. In my career, I have encountered very few good deals, and the slow committee-like manner that the banks evaluate deals leads to many other offers competing with mine because of time delay.

This Article is Meant to Serve Two Purposes:

Purpose #1 – To develop a roadmap; where real estate agents and realtors will learn how to earn profits from listing short sales. I will show you how to literally have investors lining up at your doorstep giving you their listings. Not once but twice! That’s right; can you imagine getting paid commission twice on the same property, within the same year? Listing agents will benefit the most from this information which is evident by the articles’ title.

Purpose #2 – To give the short sale investor an idea of the level of competency, character, and skills they should look for in a real estate agent or realtor. Choosing the right agent is an extremely important part of the short sale process.

Let’s be frank. If you are a licensed real estate agent your primary goal is and always will be to prospect for listings and buyers. Not only am I a real estate investor I am also a licensed real estate agent. In addition, I work with a handful of other real estate agents who would find it hard to replace their income if I stopped giving them my business.

Did you know that a mortgage lender who holds title to a property that is in danger of foreclosure will often allow up to a 6% commission to be paid to a real estate agent if it is sold through a short sale? There is a huge market for agents who truly understand the short sales process and can handle the various tasks involved in order to assist the investor.

As an agent, I would suggest that you communicate with your broker before you attempt to pursue a short sale listing for the first time. Make sure that you are in line with the company and office guidelines and that you are not jeopardizing any terms of your license agreement. It will also be a wise idea to find out if any other agents in your office have had success listing short sale properties. Don’t be surprised if your broker is not too familiar with the short sale process. I’ve found that many are not.

There are several items that are necessary for the process to work. First, you must be able to convince a short sale investor that you are capable of doing all of the following:

1. Pulling accurate comps that justify the amount of the short sale.
2. Writing up a sales contract.
3. Filling out a net sheet for short sale transactions.
4. Negotiating the terms of the agreement with the lender if needed.
5. Showing the property to prospective buyers.
6. Flexibility on terms of a traditional listing agreement.
7. Marketing the property.
8. Providing referrals and recommendations of valid service providers.

Your responsibilities will not be limited to the list above. There is a still a vast amount of hard work and dedication needed to become known as a preferred agent for short sale investors. However, the reward is well worth it.

Once you feel confident and knowledgeable of the short sale process you are now ready to market your services to investors. Short Sale investors who are being proactive and finding his/her deals before the foreclosure process starts will usually have the most need for your services. Agents that I work with spend more than 60% of their time matching my properties up with buyers, pulling comps, and filling out net sheets. I would say they spend approximately 6-8 hours on each deal and receive an average of 4.5% in commission that I almost always have pre-negotiated with the lender.

The real bonus is that if I decide to put the property back on the market immediately after the first closing I will 9 times out of 10 list it with the same agent. Now they have the opportunity to re-list the property and make another commission. Because of this arrangement, I always agree to pay a discounted commission. Once the property is re-listed, it typically sells quicker than the average listing; mainly because it is sold below market value which makes it an excellent purchase for another investor or a homebuyer looking for a steal of a deal.

The agents that I work with are capable of handling the short sale process from the moment I submit my package to the lender. Based upon my knowledge of certain lenders processes, I determine whether it’s best for me to take on the negotiations as an investor, or if I would rather quarterback the deal and let my agent be the main point of contact. I always have that option. No matter which route I take I still make sure that the lender pays a commission. So it’s a win-win situation for everyone involved.

I hope that you are not too confused at this point. I will do my best to explain more on this topic in part 2 of this article.