The Art of Short Sales

Fresh Ways to get Short Sale Leads

Everyone knows that a good short sale professional needs to have leads to be productive. That means that part of your workload needs to include finding new opportunities and getting your name out there. It doesn’t matter if you are a short sale investor or agent; without leads you have no work!

There are two major methods to finding leads, passive and active. We will describe each type and then give examples of what you can do in each category (and you should be using both methods!)

Don’t underestimate the effort involved with finding leads. Some of our members report spending almost 50% of their working time just working on building leads and their pipeline! Remember that marketing is is a curve; especially as you are starting out and building a name for yourself, it can take a lot of effort to build your reputation, but it is a snowball effect, so keep pushing! The most successful short sale professionals use a combination of tactics to keep leads coming in 24 hours per day!

Passive Short Sale Lead Finding

No, passive does not mean you don’t do anything at all! What it means is that you build systems where the leads come to you. This is a great system, and once setup, can drive business to you without needing too much additional upkeep and effort when compared to Active lead finding. There are a lot of ways that you can find short sale leads passively!

Maintaining a Short Sale Blog

Keeping a blog is a great way to get traffic and get your name out there. The National Association of Realtors has said that almost 9 out of 10 individuals use the Internet to research their home options. But it does take time and effort! All Short Sale Artisan users get a free WordPress blog that can be customized and used with their own domain name.

Using a blog for short sale leads is more than simply creating it, as we alluded to earlier. You need to post content. You can easily find content by searching Google News, other blogs, or writing opinion pieces. Be sure to use keywords from your local area to target local investors – for example, a headline could be “How to Handle a Short Sale in Las Vegas, Nevada!”.

Make it a part of your routine to regularly post content on your blog to keep it active, and encourage comments and networking. You should write at least a post per month at the absolute minimum (preferably one per week). A typical post should take you no more than 2 hours to write, proof, and put out there, and it helps you establish credibility as well.

Syndicating your Blog Content

Don’t keep your blog on your site – get the word out there! There are a few ways you can syndicate your blog content. One way is by submitting your blog using your blogs RSS feed – this RSS feed is a special URL that can be used to automatically feed updates of your site out into the Internet. You should also install plugins to your blog to automatically post your short sale content to Twitter, Facebook, and other social networking accounts.

You can also manually copy your blog content onto various sites that allow you to post blogs, including sites like ActiveRain, BiggerPockets, and RealTown.

One final thing you can do is author articles on authoring sites – such as eZine articles. Another benefit of syndicating your short sale content is that all these link to your blog and increase traffic to your site, which in turn builds awareness of your services and products.

Twitter

Twitter lets you push out your short sale tips in small fashion. Start by interacting with the vibrant short sale community that exists on Twitter. This will also help build a reputation for you. Find other people’s blog posts through Twitter and comment on them. It’s important as well to build followers on twitter, and there are several automated tools that will post relevant content to your twitter account on a regular basis, like Twitterfeed.

Facebook

If you don’t know about Facebook, you have been living under a rock. Using Facebook for short sale lead finding can be very useful – Start by setting up a “page” for your business and branding it. Encourage people you have worked with before to become a fan and post relevant information frequently. Remember, blatant advertising is often a turn-off in social networking, so be sure to give some good tips and advice, for free, interspersed with mentions of your services that you provide.

Word of mouth

Meet people! Visit your local chamber of commerce. Hand out business cards. Encourage people you have worked with to spread the word about your services. The Referral Engine for short sale leads is one of the best ways to keep business coming in – but it relies heavily on your clients having had a stellar experience with your services, so make sure you deliver!

Seminars / Conferences

A great way to meet people with whom partnerships can be formed is seminars and conferences. These occur at real estate and short sale conferences nationwide. There are local chapters nationwide of the Real Estate Investing Associations (REIA), Real Estate Agent conferences, and more. Find them, attend, and be liberal with your business card! If you are an investor, you will want to meet with lots of realtors who you can work with. For agents, you will want to meet with other agents and talk about their lead generating strategies. Networking in general is a great way to build your influence and seminars and conferences feature like-minded individuals in the same industry.

Similar to Facebook, create your company (if you are self-employed) on LinkedIn and promote it!

Finding Partners

This doesn’t mean splitting your work. It means partners to do portions of the work. For example, an investor may partner with a real estate agent, or a real estate agent may partner with a short sale attorney. If you find a person that has been a pleasure to work with, keep the relationship thriving and they will think of you when opportunities arise that they are made aware of. It is very similar to the referral engine from past clients in this regard.

Media Exposure

If you are a knowledge expert, pitch to the local news agencies. Foreclosures and the short sale market are in hot demand right now; and local news loves to hear from people involved in the industry to pitch their ideas and commentary. Another benefit of media exposure is that it also creates trust in your operation, which is very useful in an industry that certainly has its fair share of scam artists.

YouTube / Video Sites

Putting your mug up on YouTube or Vimeo is a great way to get your name out there. An example of two guys who have had good success with this is Group 46:10, who provides short sale training.

Active Short Sale Lead Finding

Active short sale lead finding means actively pursuing those who are in default. This is a tried and true method, but requires constant attention and pressure. Temporarily halting your efforts also temporarily halts any results or leads you may find from these methods!

Most of these methods involve scouring sources for potential leads and then actively following up on them. The benefit to this method is that you are targeting people who are in need directly; as opposed to blanket passive marketing where you hope someone will find you or be referred to you. This is more of the traditional “sales” types of activities.

Direct Mail

A tried and true short sale lead generating method. Sending direct mail to homeowners who are behind on their mortgages simply works. Short Sale Artisan sells leads to its members at discounted rates for homeowners in a given area who are behind on their loan payments by 30, 60, or 90 days but have not yet received a Notice of Default. These are prime candidates for a short sale, as they are behind on their payments but have not entered public record yet as being behind on their mortgages.

There are many methods of handling direct mail, but generally the suggested process is:

Identify who you will send our mail campaigns too (using pre-NOD lists is the best method)
Send out a first round of letters informing the service (Short Sale Artisan has full templates for all these docs in our Template Library!)
After a certain amount of time, send out a follow-up letter reminding them of the services you offer
After a period of time, send out a final third letter

It has been generally proven that going beyond a 3rd letter is unnecessary and wasteful. It does take time to build and manage these mail campaigns, but they nearly always result in new work in your pipeline!

Cold Call / Door Knocking / “Bird Dogging”

Similar to the Direct Mail, this often works but is time intensive. Pre NOD lists your purchase may include phone numbers. Door knocking is even more preferable than cold calling (be sure to dress for success!), but the disadvantage is time. You can call 15 people in an hour but perhaps only visit 4 or 5 houses on foot. Plus, phone calls can be used to market outside of your geographic area.

Another option on door knocking is “bird dogging”. This is basically outsourcing your door knocking operations to novice short sale investors. Bird dogs will go door knocking for you in return for a commission on any successful closes. The benefit is less time you need to spend going from house to house; but the negative is you lose some of your profit to the bird dog.

“Bandit Signs”

Bandit Signs are the signs you see on telephone poles and street lights around your home town that proclaim “We buy houses cash!”. These have limited success. Additionally, you should be aware of any town ordinances against public advertising – some towns will levy fines if you staple these signs on every streetlight in an area.

The benefit of bandit signs is that they are quick to put up and get you exposure. The call rate is very low, but even a handful of calls can make it very worthwhile if a lucrative opportunity pops up.

MLS Search

The MLS is a great site to find new leads. Search for keywords that are typical of short sale eligible properties, such as “Distressed” or “Quick Sell” or “Motivated Seller”. these are indications that there is a time constraint on the sale of the property. You can search the MLS directly from Short Sale Artisan’s Lead Finder.

Specialty Sites (foreclosure.com)

Foreclosure.com is similar to the MLS except it focuses on foreclosures and, more recently, short sales as well. Foreclosure.com contains REO properties and other distressed properties. The downside is it costs some money to become a member; however they do have a free trial period if you see something of interest.

Craigslist / eBay

Other searchable sites include Craigslist and eBay. On Craigslist, you can also post your services directly. eBay has a properties section, and similar to the MLS, you will want to search for keywords that correspond with short sales, like “distressed” and so on.

Keep it up!

Remember, marketing is not a one – time job. Finding leads takes a considerable amount of time – so build a system and a process in place where you utilize all the marketing channels effectively.The best marketers use a variety of methods and integrate them cleanly – for example, new blog posts are automatically posted on Facebook and tweeted on Twitter.

Do you have any tips of additional ways to find Short Sale Leads? We’d love to hear about them in the comments!

The Key to Successful Short Sale Transactions is Understanding Motivations

We have spent a lot of time talking with our users over the past year about what works (and perhaps more importantly, what doesn’t work!) when managing your short sale pipeline. One of the key differences between successful investors and agents and ones that struggle (and a key factor in improving your successful closing rates) is quite simply putting yourself in all involved parties shoes and finding common ground. You need to think about the motivations of the bank or lender, the homeowner, the real estate agent, the buyer(s), and any 2nd lienholders that drive the decision making process. Understanding how these motivations conflict with each other will help you find common ground to get deals closed.

Let’s run through them one by one!

The Bank or Lender (Primary Lienholder)

This is it – the big kahuna. The bank has the keys to the castle, so don’t underestimate their motivations when it comes to a short sale transaction. The bank’s short sale decision making process is driven by a single factor – money. Remember – the bank’s ideal situation is that you continue to make your payments on the agreed-upon schedule. This ensures that they make the interest on the loan and get the balance paid in full.

Let’s circle back to motivation. What motivates the bank to accept a short sale offer? If you guessed $$ Money $$, you are right! It’s a bit of an inverse situation though – banks get into loans expecting to be repaid the principal balance plus interest. In this case, you are asking them to take less money – and the only way that is going to work is by demonstrating that the alternative is even MORE less money. In other words, the burden of proof is on you to motivate the bank to accept your offer by proving to them that their financial position will be worse if they do not accept the short sale. This is typically done by carefully explaining to the bank what the outcome will look like if they go all the way to foreclosure, and then additionally proving that foreclosure is imminent.

So, let’s recap on how to motivate the bank -

Prove that foreclosure is a more financially damaging than a short sale and back it up with evidence! (See screenshot below)

Prove that foreclosure is imminent and cannot be prevented and back it up with evidence! ( A good short sale hardship letter helps, too

The Homeowner

The homeowner is in a different situation. They are falling behind on their payments, are hopelessly underwater, and it appears to them there is no way out!

Similar to how the bank is mitigating their losses in a short sale, the homeowner also wants to mitigate the damage to themselves and their families. The motivating factor for a homeowner to pursue a short sale is getting themselves out of a bad situation that is going to get worse. The interesting thing about a short sale from a homeowner’s perspective is that, unlike a typical home sale transaction, the homeowner / seller really does not care any more about the sale price of the house. This is because they are already underwater – and to them, getting out of $50,000 or $75,000 really isn’t significant – it is the getting out that is significant.

The only time that changes is when the lender is looking for the homeowner to assume a deficiency judgment. In that case, the homeowner will still be motivated to minimize the loss, since they will be responsible for it after the sale completes.

Use the homeowner’s motivation to get out of their situation to get them to play their part in the transaction – including providing necessary supporting documents about their financial situation and a good, strong hardship letter. It is best if you can negotiate away any deficiency judgment (HAFA properties will automatically have no deficiency) to keep the motivation of the homeowner strictly on leaving the property – but recognizes this directly conflicts with the bank’s motivation – money. Our recommendation in this scenario is to try to work for the homeowner’s benefit – carrying a deficiency without having any asset to back it up is not a fun situation to be in.

The Realtor

Like any real estate transaction, realtors want to close the deal and make commissions (under the guidelines of NAR or other realtor ethics codes). It’s their job, after all!

A motivating factor for agents is most certainly the time involved in a transaction. Time is money, and many real estate agents despise working with short sales because (yes, it is true) they take more effort than a standard transaction. Being in the middle of a real estate transaction is enough work, now you have to throw in the multi-month bank approval process and due diligence phase and deal with additional red tape, for the same commission.

Motivating realtors, then, can be done by improving their processes or saving them time. If you are the real estate agent, then your motivation should also be to save more time. If a particular home nets you a commission check of $2000, and it took you 30 hours to make it happen, vs. 60 hours for a similar check on a short sale, you worked for half the rate on the short sale! ($66 an hour vs. $33 an hour, respectively).

How do we improve time? By building efficiencies and work flows into the process, especially for repetitive tasks. Short sale software like Short Sale Artisan is certainly one way to improve efficiencies. So is a simple spreadsheet. Another one is simply making win-win situations right off the bat by reading blogs like this and understanding how to meet the motivations of the parties involved in a transaction to improve both rate of a successful close as well as reduce the effort needed for each transaction.

Another motivating factor for agents is simply business. They just want business – quantity is important! Even if agents do not like short sales, the bottom line is being a successful agent in today’s market depends on understanding and working the short sale process successfully. If you want to have a good pipeline of work going, then you need to include short sales in your portfolio.

The Buyer

The buyer’s motivation is the same in a short sale transaction as a normal transaction – it is all about getting the best price! Whether the buyer is an investor looking to eventually flip the property or a family looking for a place to live, the price is what matters. Many buyers are attracted to short sales and are motivated to work through one despite the onerous timelines and red tape simply because they often represent a good deal.

We again have a conflict here – the conflict that in a normal transaction exists between the Buyer and the Seller, in a short sale transaction is between the Buyer and the Lender. In a short sale, the buyer still wants the lowest price possible, but this time the lender, not the seller, wants the highest price.

Like any other real estate transaction, keeping a buyer motivated depends on their needs. For a family, it might be demonstrating a property to be a good family home, in a good neighborhood, or demonstrating a great value. For an investor, it might be demonstrating the ability to improve the value of the property and resell it at a future point in time, or keep it and rent it out. In any case, there is really nothing unique with the motivations of an end buyer in a short sale transaction to differentiate from your typical transaction.

The 2nd Lienholder or Subordinate Lender

The second lienholder, if there is one, has the exact same motivation as the first lender – money. So the same rules apply. The only additional wrinkle with the 2nd lender is that their “loss” in a short sale is typically much more than the first lenders. For example, a second lienholder may have a principal balance of $25,000 and only expect to recieve $1000 at closing – a measly 4% of the principal balance in such an example.

This is why the case needs to be ironclad that foreclosure is imminent (in which case, the 2nd lienholder would get nothing). The bottom line though: if there is any doubt as to the validity of the hardship, a $1000 check may not be enough to keep the lender motivated to accept the terms of the short sale arrangement. So it is doubly important to make your case well to these parties!

Keep the motivations of everyone in mind

The bottom line: when handling a transaction, you are effectively juggling the motivations of all parties involved in the short sale transaction. Keep that in mind when you are dealing with individuals, and you will close more deals and be able to find common ground when disputes occur quicker. Flexibility and some political posturing apply!

What are your thoughts on motivations and how to use them to inspire success? Post in the comments!

How to Avoid Being Scammed by Real Estate and Short Sale Gurus

There has been a lot of talk on the Internet the past few days about so-called Short Sale Guru's and some of the scams they may or may not perpetuate. We have strong feelings about scammers at Short Sale Artisan, and that is: Steer Clear at All Costs!

Like any industry, there are always a few bad apples that can perpetuate the image that the entire industry is corrupt or full of selfish, greedy individuals looking to take advantage of other people.

Real estate in particular has always been a trap for that. It's hard to visit real estate sites anywhere on the Web without seeing promises of "Getting Rich in 30 Days" or "Make $10,000 In 5 Days without Having to Do Anything!". Let's be clear - there is a lot of money to be made in real estate, and real estate can be an incredibly lucrative industry. But don't think for a second that it's easy or painless. Being successful in real estate, like any other industry, requires work, perseverance, and constant self improvement. The old adage rings true: If it sounds too good to be true, it probably is.

Psychology behind being "suckered"

In a lot of ways, people get suckered for these get rich quick schemes the same way they do with diet pills. Many individuals, particularly those who are in a difficult position in life, will spend their last few dollars trying to buy some course or program that they think will just pile in money for them. It just doesn't work like that, just like a pill won't melt away the Bacon Double Cheeseburger you ate last night. Even MSN posted a great article on so-called real estate riches, doing some hefty analysis into the real estate investment psychology.

"It's the jackpot mentality," says psychologist Patricia Farrell, author of "How to Be Your Own Therapist."

Just like the schmoe who buys a winning lottery ticket -- every once in a while, someone, somewhere really does use these edgy real estate investment techniques to make millions. "It's not the principles that are flawed," says Bour. "It's the simplicity and ease that are overstated."

Most of the information that is taught by the so-called gurus is available free on Internet forums like Bigger Pockets or REI Club and can be gained for free, by talking with other investors in user forums who have or are in the process of actually doing the type of real estate investment you'd like to do (be it short sales, commercial properties, investment properties, rental houses, or fix & flip). It requires you to search out information and be proactive about it -but if you aren't willing to at least put in that level of effort, don't expect to gain anything more just because you shelled out $2500 on a spiffy real estate course.

Evaluating a real estate investment product

That's not to say all products are bad. You just need to be very careful with how you invest your money. Many courses are education, and education is invaluable. Next to a $100,000 college degree, a $2500 course can sure seem quite reasonable. But, like the college degree, its what you do with that information that determines if your up front investment was worth while.

Research the company and the owners of the company

This is such an obvious step, but spend the time to research what you are investing into. Find out how long the company has been in business, and where they operate out of. Find out who the owners of the company are, and if they have true experience in the industry.

The great thing about the Internet nowadays is that it's quite easy to find out if people are scamming, because people are very quick to post about bad experiences they have, and it's hard to hide from bad press. There are also many websites dedicated to reviewing real estate guru's and their courses. They are worth checking out as well. Here are two to get you started:

Also, you should look also on Facebook and Twitter and see what people are talking about.Remember that these mediums are easily manipulated and affiliates and company shills can easily post "pretending" to be customers of the company. It happens all the time.

Make sure as well that the owners of the company / the Guru - has experience in what they are doing. They should be able to back this up with documentation and proof, and not self-created proof, like we have recently seen with this Karen Hanover scam that is percolating around the Internet. (Can you believe it? Some gurus will go so far as to self-invent designations for themselves that don't really exist!)

Talk to people who have been through the course

Under no circumstance should you ever sign up for a class or course without talking to someone who has already been through it. Learn from others. You can get a feel then also for the content of the class and the value it provided.

Use common sense

Our rule of thumb: anyone who promises something crazy, is probably crazy. Also - don't be a marketing puppet. You know marketing when you see it. Don't fall for it! Use common sense, and look at the features of a package - not just the marketing hype. Over the past few months, we have found it amazing that some people can fall for such obvious marketing ploys. YouTube videos, extensive affiliate networks, and more; just go to reinforce the marketing perspective.

At Short Sale Artisan, we take great care not to patronize our clients. We believe every client of ours is a self-driven individual who is looking for tools to make their lives easier. That's what we promise to deliver. We don't promise free money, or easy-street, or that you won't have to work again for the rest of your life in 84 minutes. Anything that promises to do the work for you and give you a 100% chance of success is a red flag, period.

Finally, don't fall for time-pressure tactics. You will always here that you need to sign up today. You don't. Your decision to take a course should be based on your desire to take one. Not a pitchperson planting that in your brain. A successful, well designed real estate course will be around tomorrow, next week, and next month. This is especially true on webinars where you will be pressured with "limited time bonuses" and other goodies.

What is the return and guarantee policy

You'd better be sure that if you aren't satisfied with the course, you have a way to get your money back! Make sure you research this ahead of time!

Price to Benefit Ratio

It's easy for Gurus to convince you that their courses or software products are worth the steep up front fees, because they can make the easy claim that "All you need to complete is one deal and you will make back many times your investment". That's true, but if they are so confident in the ability to deliver that one deal - they should let you pay after you've made your first deal.

Our opinion: look at what you are getting. It makes no sense to pay $2500 for a "setup fee" for a piece of software, in our opinion. What software out there costs that much money, unless it is an enterprise level piece of software for a company with dozens or hundreds of employees? We feel that these exorbitant setup fees (charged by companies like Freedom$oft) is almost extortion. These companies aren't making their money by providing a good product at a fair price. They are making their money by suckering a few people into signing up for empty promises. In our opinion, this is not only scammy, it's also highly unethical. These types of deals lead people to feel like they have "sunk cost", that is; they have invested in the system and do not want to cancel, even though they get no benefit from it.

Industry damage

Another unfortunate byproducts of scammers is that they make the industry look bad and shady, when it truly is not. We've all read about the Freddie Mac report on investor fraud. These types of things are strongly perpetuated by the "bad apples" in the investment training and education categories. Overall, views of investors range from "meh" to "unethical", even though the majority of investors are stand-up people making a living with a true career path, like any other entrepreneur. That's why it is so important we self regulate and weed out these guru scams and investors who behave inappropriately.

Some scams, exposed!

Just in the past two weeks, a big one has been the Karen Hanover commercial real estate investing. This one involved creating fake designations and placing falsehoods on an resume.

The “associations” Karen Hanover touts as being a member of CCREA NAIA (and the self storage one SSEI?) are all her own creation. In February she had the balls to create a press release to tout how the CCREA had awarded her real estate course its #1 ranking! I love tenacity and perseverance, but fraud is disgusting and seeing how there are so many dubious characters in this business, it just bugs me. Anyway I sent an email to Sperry Van Ness’s Human Resources department and got back the enclosed email. According to SVN she has never worked there and their attorneys are looking into it. ))) I have not called Marcus & Millichap.

This is pretty scary stuff. It's so easy on the Internet to look professional and real, and that is why so many people fall for scammers. It's not enough to be presented designations - you need to follow up with them! Now, that's not to say that Karen Hanover doesn't have valuable information to help you out in your real estate investing career - we are only suggesting that you need to tread lightly when contemplating courses such as hers. It certainly doesn't leave a great first impression when you hear about how things like her designations are fabricated.

So what should I do?

We are not against real estate courses or investments at all. We just think everyone needs to step back, take a breath, and not be blinded by the promises that are made by the marketing wizards that run these companies. Evaluate the course for what it really is. We personally feel that the best courses are ones that aren't "in your face" marketing, but are more subtle and have some more composure. These courses stand on their own, and don't need ridiculous promises to drive hype up to people who are vulnerable to the small glimmer of financial freedom with zero effort. You don't see real education institutions (like colleges) pulling these types of marketing tactics, so you should be turned off when you see high pressure sales tactics.

We'd love to hear your stories in the comments about companies that scammed you! Exposing them, as we mentioned above, is one of the most important things we can do to clean up the industry. There is a lot of real, legit money to be made investing in real estate, especially short sales with the market today. Remember, even a good course does you no good if you just attend and don't do anything afterwards. Action is necessary!

Visit the original post at The Art of Short Sales Blog

Short Sale Report 2010: Fraud, Forecasts, and More!

Came across this press release by CoreLogic which puts out a short sale research study with some very interesting statistics, the first of which has to do with short sale fraud, which we have talked about here before.

You can download the full PDF file, for free, by clicking this link HERE. It’s a very interesting and detailed read about the state of the short sale market.

On Fraud

The estimated industry financial impact of short sale fraud is $310 million annually with the risk of ‘unnecessary losses’ occurring in one in every 53 short sale transactions. The average amount of unnecessary loss is $41,000 per short sale transaction.

It’s an interesting statistic, and we wanted to know more about how CoreLogic arrived at this number.

The definition CoreLogic uses to define Short Sale Fraud is:

“where parties involved in the process manipulate the short sale transaction and/or subsequent
transaction for a profit.”

They have interesting logic in the article that essentially correlates duration after a close with a resale to likelihood of fraud. In other words, even with disclosure of intent to resell, selling a day later for $30,000 profit is much different than selling 30 days later for the same profit, because in those 30 days things could have changed, like improvements on the home or even a shift in property values.

We are still in the same boat we have always been on – advocating for disclosure, disclosure, and more disclosure – you want to keep your head above water legally and protecting yourself means keeping everyone informed as much as possible as to what is going on with your transaction.

They then make a comment that I fully agree with: Lenders need to do their own due diligence as well to make sure that the deal is a fair one for them. In other words, the lender should know if the market would have held a sales price of 30,000 more than the agreed short sale price.

Rather than arguing over what is fraud and what isn’t, lenders should focus on their primary objective—eliminating unnecessary loss.

And:

“By definition, short sales constitute a financial loss to lenders but will continue to be a necessary part of the mortgage industry as it seeks stabilization. The primary objective for lenders is to eliminate unnecessary loss,” stated Tim Grace, senior vice president of Fraud Analytics, CoreLogic. “The best way to mitigate fraud risk and unnecessary loss is through a collaborative effort where lenders collectively share pre-closing and post-closing information. Lenders in the CoreLogic Mortgage Fraud Consortium will benefit greatly from sharing knowledge of concurrent transactions pending on short sale properties in real time.”

They have a great graphic that shows time and resale value after a short sale transaction as well:

Other Findings:

CoreLogic 2010 Short Sale Research Study Highlights

The number of short sales in the market has more than tripled since 2008 with the estimated annual volume at 400,000. Multiple variables indicate short sales will continue to be a frequent and important part of the mortgage industry.

Over half (55.8 percent) of all short sales occur in just four states (California, Florida, Texas, and Arizona).

Approximately four percent of short sales have a subsequent resale within 18 months.

Investor driven short sales are not inherently bad. Investors provide the industry with necessary liquidity.

Short sale transactions may be deemed risky to the lender when either: 1) the second sale amount is vastly higher than the short sale amount, and/or 2) the two sale transactions are executed within a very short window of time.

Short sale fraud exists. While the exact definition of what constitutes fraud continues to evolve, CoreLogic analysis indicates lenders are consistently incurring more loss than necessary. Approximately one in every 53 (1.9 percent) short sale transactions was part of an egregious flip and therefore deemed risky.

It is estimated that lenders are incurring unnecessary losses of $300 million in short sale transactions annually.

Group, consortium analysis and reporting are necessary to fully leverage multiple-lender data and mitigate risk.

All in all, a very good (and short!) read that talks about what is happening and reminds us of many things:

Disclose your transactions
Investors are necessary in today’s market
Short sales are still in a peak and are expected to remain for some time into the future

What are your thoughts? Share them in the comments!

Looking for Short Sale Software? Visit Short Sale Artisan today!

Freddie Mac Short Sale Fraud: Much Ado About Nothing?

Over the weekend, Freddie Mac published an informational article discussing what it has called, “Short Payoff Fraud”.

This article tipped off quite a bit of anxiety among investors and agents. Many are suggesting that this new classification of “Fraud” effectively eliminates the A to B – B to C transactions which investors often use to “flip” short sale properties.

Well, I read the article, and I think everyone is making a big deal out of nothing. Here at Short Sale Artisan we always, always, always suggest that as an investor you should disclose every detail of your short sale transactions to the lender, or risk legal trouble. We aren’t lawyers, but you can never hurt yourself (legally) by providing too much information. We talked about it in this article on the root cause of the foreclosure crisis, in this article on about deficiency judgments, when we discussed 2nd lienholder fraud, and even how important disclosure is when assembling your short sale package.

Let’s read the direct quote from Freddie Mac:

What is short payoff fraud?

According to a member of Freddie Mac’s Fraud Investigation Unit, a slight variation of our general definition of mortgage fraud also defines short payoff fraud – “Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.” Misrepresentations in these schemes may include the buyer of the short payoff property, a subsequent transaction at a higher price, and/or the selling borrower’s hardship reason used to qualify for the short payoff. In many instances, the short payoff fraud will involve a “facilitator,” engaged by either the listing agent or the selling borrower, to assist with negotiating the transaction.

I think it’s pretty clear what they are saying. Hiding information or deliberately omitting information to the lender that may impact the lender’s decision is fraudulent. I’m not sure what the big surprise is here. This has always been the case – recent short sale fraud cases in Connecticut prove it.

More detail:

There are many variations of short payoff fraud. The example below is just one way this type of mortgage fraud can occur.

A seller (delinquent borrower) owes $100,000 on a property that is worth $80,000.

The short payoff facilitator negotiates with the bank to accept a $70,000 offer to purchase the property. In several instances, Freddie Mac has seen that this offer will be made directly by the facilitator or through an entity under his/her control.

The lender/investor accepts the offer for $70,000.

The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000.

Both transactions close on the same day with the net difference being pocketed by the facilitator and increasing the lender/investor’s net losses.

At first glance, this may look like a legitimate short payoff. However, in this example, the fraud is the failure to disclose the second, higher offer. The facilitator is willfully withholding important information the same way a scam artist would, and the lender does not realize they are walking into a premeditated short payoff fraud scheme. Because the facilitator is deliberately withholding the higher offer, Freddie Mac also experiences a larger than necessary loss on this sale.

Solution: Disclose your B-C transaction. Here’s the thing, and this is what investors need to be good at doing: making the case to the bank to accept your offer. Perhaps you were able to negotiate higher than market value. In the above case, if you as an investor can find someone to pay $95k on a property that is worth $80k, good luck!

Most banks already require you to disclose anyway in a short sale transaction. Again, we aren’t a legal blog, so please contact a lawyer if you want legal advise, but you should be disclosing as much as possible in your transactions.

An alternative solution is also to keep the property to fulfill seasoning requirements, then sell it. This can be done with hard money loans, but make sure you include carrying costs when calculating what profits you might be able to expect at the conclusion of a deal.

More from the Freddie Mac article discussing what they consider to be “red flags”:

Short Payoff Fraud Prevention Red Flags

Remain alert to the following flags, which may suggest short payoff fraud:

Sudden borrower default, with no prior delinquency history, and the borrower cannot adequately explain the sudden default.

The borrower is current on all other obligations.

The borrower’s financial information indicates conflicting spending, saving, and credit patterns that do not fit a delinquency profile.

The buyer of the property is an entity.

The purchase contract has an option clause to resell the property.

The first three red flags are more indicative to me of someone looking to “strategic default”, not short sell the property. Lenders should be doing their due diligence anyway when someone requests a short sale to validate the hardship scenario is legit.

Similarly with the remaining two bullets: a buyer may very well be an entity and option contracts still exist. There is nothing illegal about using one. Lenders should again be doing their due diligence on these documents when in the short sale offer period. Assuming the information on those forms is truthful, the investor has nothing to worry about here.

Finally, these are Freddie Mac’s suggested prevention / mitigation tactics:

Short Payoff Fraud Prevention

The following protective measures are recommended in order to detect and mitigate the severity of short payoff fraud:

Review all short payoff documentation carefully, including the sale contract. This helps determine if there is an option clause to resell the property at a higher price without notifying the lender.

Draft a short payoff arm’s-length affidavit/disclosure notice for all parties involved in the short payoff to help avoid any hidden contracts, or side agreements. The parties involved should be, but are not limited to: the buyer, seller, listing agent, selling agent, short payoff negotiator(s)/facilitator(s), and closing agent.

Solicit information from your borrower.

Inquire if the borrower is aware of any other parties involved with the short payoff other than real estate professionals.

Is there a short payoff negotiator/facilitator involved?

Is the borrower aware of any other purchase contracts on the property?

Require an executed and signed IRS Form 4506-T, Request for Transcript of Tax Return,from each borrower and process the form to determine if the borrower’s qualifying income is accurate.

Order an interior Broker Price Opinion (BPO) and review all other BPOs that have been ordered on the property (drive-bys and full interiors) to establish a high/low value variance. The BPOs should include a past and present Multiple Listing Service (MLS) listing history, as this will determine if the property was relisted in MLS while the short payoff is being processed.

Review the Freddie Mac Exclusionary List to see if the parties to the short payoff are on the list. Seller/Servicers can access the Exclusionary List via the selling system, MIDANET®, MultiSuite®, and Loan Prospector®.

Immediately notify Freddie Mac if you are aware of a second purchase contract for a higher price

Again, do you see anything here that all lenders (not just GSE’s like Fannie Mae and Freddie Mac) aren’t already doing? Seriously – a suggested step for the lenders to take is to “review all documentation, including the sales contract”?

Post your thoughts in the comments! Do you think this will impact your investing business? What are your thoughts on short sale disclosure?

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Fannie Mae Speeds Up Short Sale Sellers Second Chance

National Mortgage News Online reports:

Fannie Mae has decided that certain distressed borrowers who agree to give up their homes as an alternative to foreclosure should get a second chance at homeownership sooner.

The policy change, announced Wednesday, is meant to reward borrowers for cooperating with their loan servicers and to support the housing market.

The government-sponsored enterprise told lenders that for borrowers who grant a deed-in-lieu of foreclosure, it will shorten the minimum waiting period to be eligible for a new Fannie mortgage. Currently such consumers must wait at least four years. Beginning with applications submitted July 1, the period will drop to two years, provided the borrower puts at least 20% down on the new home.

Credit experts called the change an acknowledgement that borrowers who work with their lenders are better risks than those who simply mail in the keys.

This initially seems to me to be an attempt to mitigate “strategic defaults”, i.e. just walking away from the property, rather than working with the lender through the hardship. While in theory, this makes sense; the problem is that many of those who are strategically defaulting are doing so because they wouldn’t be considered by the bank to be a good candidate for a short sale. Often times strategic defaulting is just “walking away” even when the ability to pay the mortgage still exists. In that case, the homeowner who is determined to walk away will still do just that, because approaching the bank to negotiate without existing or imminent hardship is almost always a dead-end road.

“It makes sense to be a little bit kinder to borrowers who have made an effort to do something about the loan and did not just walk away and say it was the lender’s fault,” said John Ulzheimer, the president of consumer education at Credit.com Inc., a lead generator. “Someone who fights to complete a short sale is likely to be a continuing strong credit risk going forward if they are not saddled by a disadvantaged mortgage.”

Still, the change is not a giveaway. Fannie also set stricter parameters for borrowers who have tried to rehabilitate themselves. If they can make only a 10% down payment on the new home, the wait period remains four years after granting the deed-in-lieu.

20% down payment is still pretty significant, and 2 years isn’t a lot of time to gather funds to that amount. So, my expectation is that participation in this will be “light”.

Still, I do wonder about the correlation between paying loans back on time and making an effort to work out a situation with the lender. It seems a bit “touchy-feely” to me.

None the less, for investors and realtors working out there, this is something you can pitch to homeowners right now who are distressed with a Fannie loan.

Fannie officials would not discuss the changes beyond the lender bulletin, which said the GSE’s goal was “to support overall market stability and reinforce the importance of borrowers working with their servicers when they have difficulty repaying their debt.”

The announcement comes on the heels of the Obama administration’s Home Affordable Foreclosure Alternatives program, which began April 5. It aims to streamline the complicated processes of short sales and deeds-in-lieu. The program is aimed at homeowners who do not qualify for a loan modification and industry experts expect a dramatic increase in such “preforeclosure actions” this year and next.

In a short sale, the home is sold for less than is owed on the mortgage and the lender accepts a discounted payoff.

Mortgage lenders have expressed concern that a dearth of homebuyers will cripple a housing recovery. At least 6 million homeowners have gone through a foreclosure in the past three years and another 3 million are expected to this year, according to RealtyTrac Inc., an Irvine, Calif., data tracker.

Such borrowers are essentially shut out of the housing market because, with a foreclosure in the last five years showing up on their credit report, they are not eligible for loans that can be sold to Fannie and Freddie Mac.

“People in trouble don’t really understand the credit system,” said Rayman Mathoda, the president and chief executive of AssetPlan USA, a Long Beach, Calif., firm that arranges short sales. “From a credit standpoint, a short sale, a deed-in-lieu and a foreclosure are all the same thing.”

Mathoda has teamed up with other mortgage executives to lobby the Treasury Department and the GSEs to adopt a plan, called Second Chance, that would give a wide range of borrowers who have lost their homes the chance to be rehabilitated after two years if they undergo credit counseling. “A short sale is a proactive resolution to a credit problem, while a foreclosure is reactive,” she said.

An interesting move by Fannie. I find the last comment by Rayman Mathoda a bit subjective: from a credit standpoint, a short sale, deed in lieu, and foreclosure are certainly not the same thing.

What are your thoughts? Post ‘em in the comments!

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