Buying a short sale can be a great way to make a smart real estate purchase, given the conditions in today’s market. More frequently, home buyers want to look at nothing but foreclosures, REOs, and short sales during their real estate search. However, just because a property is being sold as a short sale, or some other form of a distressed asset, does not mean that it is necessarily a good purchase. This article will focus on the top three mistakes to avoid when buying a short sale as a residence.

Short Sale Mistake Number 1 - Don’t Fall in Love with the Property

Real Estate is an emotional purchase. As a matter of fact, most purchases are emotional purchases. When we make emotional purchases, we do a funny thing. Many people don’t realize this, but when we make emotional decisions we tend to justify those decisions with logic.

For example, I want to buy a four door Jeep Rubicon. I like them. I want one. The other day I thought to myself that it might be time to buy that Jeep solely based on the fact that our economy was in such bad shape. I started thinking that I could probably get a really good buy right now. I even started thinking that if I end up waiting a few years that I will probably end up paying more for the same Jeep that I could buy now. So I should buy one know. In my head, I am trying to logically justify an emotional decisions.

The same thing happens for home buyers, only the emotions when buying a home are a lot stronger (typically) than when buying an automobile. Some common logical justifications for emotional home buying decisions that I hear are:

• The house is pretty expensive but it is closer to work and we can save money on gas
• We might lose money when we our current home now, but we can make it up on the purchase of a new home
• The house is smaller, but that makes it easier to clean
• That extra bedroom would be great if (fill in the blank) ever had to come to live with us

Don’t Be in a Hurry

Dont’ Overpay

Real estate riches are commonly created when people by real estate below market value. Market value is easy to determine, if you have the data. If you do have the data, market value can be found by looking at two factors: what is currently for sale, and what has recently sold. If you don’t have the data (or are working with an incompetent agent) then market value may be determined (or mis-determined) with false data sets. For example, here is a list of things that don’t affect or indicate value, but are commonly referenced by “experts”:

• Unpaid pricinpal balance: what is owed on the property has nothing to do with what it is worth
• The Tax Assesment: what the property appraiser says a property is worth means nothing (unless he is buying the property)
• Property sales that are more than 90 days old: the current real estate landscape changes so fast, a comparable sale from six months ago is no longer comparable. 

I suggest considering the home values from 2002-2003 when buying a home. The values from these years generally indicate “pre-boom” values. They are more closer to “normal”. These values should not be solely considered, but should be referenced as a sanity check. If you can buy today, at the price from 2002, then you are most likely looking at a relative good buy. This happens fairly regularly in a short sale transaction. Lenders know to discount the properties to a point that makes them attractive to buyers. This usually means discounting them to “pre-boom” values.

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Tags: foreclosure, real estate, REO, short sale, short sale mistakes

Two months ago, hardly anyone knew of credit default swaps, commercial paper, mortgage backed securities, and mark to market accounting. Now, guys like Hank Paulson and Ben Bernanke are household names right up there with Barack Obama and John McCain. It seems that everyone in America woke up a new financial guru because of our current financial meltdown.

It is not hard to find an opinion as to who is at fault or to hear how we ended up in this mess.
As a matter of fact, a prevailing theme is how the government and big banks screwed everyone. “Send them all to Jail”, is a common outcry. Of course, “Them” is all the fat-cats on Wall Street who got rich at the tax-payers expense.  While an element of that sentiment is probably true and healthy, most would agree, that the root of the problem is very simple and mostly removed from Wall Street and Capitol Hill. People took out loans that were leveraged against property that were neither affordable, nor was the collateral worth the loan amount. It is really that simple. The situation is not really any different than getting 100% financing on a new vehicle that you drive off the lot. Everyone knows that when you purchase a brand new vehicle, the “value” sinks that minute it becomes “used”.

How is that any different than buying a home? Prices go up. Prices go down. Sometimes people buy a McMansion they can’t afford and sometimes people by a Mercedes they can’t afford. When this happens, there is was a process for handling each situation. Our meltdown is a function of too many people not being able to afford too many McMansions (ok, they weren’t all McMansions - but that is a relative term). 

What Should we do, Then?

In my humble, simplistic opinion, what we desperately need is a simple solution for people who borrowed too much money and made a bad financial home-buying decisions. Forget Wall Street, Bail Outs, deflation, hyper-inflation, and Elections for a minute. Let’s just cut out the confusion and decree that if you borrowed money that you cannot afford, it will be paid back sometime, somehow. And the way that we are going to do it is called a promissory note. Here’s how it works. If you bought a house for $250,000 and can not afford it then you need to sell it. If you can’t get what you paid for it, then you owe the difference to your lender(s). The lender(s) can either make you liable for the entire difference, a portion of the difference, or none of the difference. The result is a simple function of your ability to negotiate and your lenders process for dealing with this particular type of loss mitigation.

Here is where the Government could help.

The Government could inject capital by purchasing these loans. In essence these promissory notes would become unsecured lines of credit against each individual borrower no different than a credit card. These loans would probably have fairly high default rates. The Government should offer to pay a fair price for these loans. After a bank reaches an agreement with a distressed borrower, the government would offer to pay a fair amount for the default deficiency note given that the note has a good chance of being a non-performer. Now here is where it gets appealing to the home-owner. Over time, the banks would learn that by charging a lesser amount on promissory notes vs. total deficiency, the higher chance that they would have to collect on the note. Therefore, the lower percentage notes would sell for a higher amount. Therefore, the banks would be incentified to strike deals with borrowers that would perform.

The bank would be incentified to do these transactions because they will recoup funds from the sale of the real property and they would either recoup additional funds by selling the promissory note or receive additional revenue from the promissory note. Either way, it’s much better than the quagmire that they are in right now. Many may be wondering why the borrower would want to do this. Why wouldn’t they just walk away. Well, to put it simply, they could. They could just walk away. And the cure for that process is foreclosure with a resulting deficiency judgment. Compare that with an affordable, low interest, long term, promissory note.

Tags: bailout, foreclosure, housing, Mortgages, promissory note, short sale

Someone once said to be careful of what you wish for as you may just get it. The voices clamoring for court help with foreclosures are getting their day in the sun in New York at least according to an article that appeared in the June 19th New York Times.

If you read the article, pay attention to the “voluntary” part and how it is phrased. I think the ground work has just been put in place to make it a mandatory program, at least in New York. I also think this program has the potential to change how trust deeds are foreclosed against. If I am right, the entire foreclosure arena as we know it will change dramatically.

By change dramatically, I mean it will spread throughout the United States and be mandatory in all 50 states. It will also be mandatory that every foreclosure pass through the local courthouse on its way to a settlement of one kind or another. It could mean short sales may be a thing of the past.

Before I go off the deep end and list a string of predictions, I’ll stop and ask anyone who reads the article to add their 0.02¢ to this thread. I believe New York has let a train out of the station that can’t be stopped. But that is how I think. You may have a different idea.

By the way, when you see the word voluntary attached to an attribution of a government official, think income tax. The government says it is voluntary. Until you don’t file that is…

Tags: foreclosure, New York Real Estate, real estate, Real Estate Law, short sale, trust deed

• We can assume that a great place to cultivate a farm area is where we are getting the most responses from current marketing pieces. This requires a bit of performance tracking but I will save that for another post. If sellers in a specific area seem to be more receptive to the ad campaigns you are using than sellers in other areas; go for broke. There is no need to spend money and time on dreams when you have deals staring you in the face.
• Go to a great online source and purchase a state-wide foreclosure list. Look for the area with the highest concentration and target that part of town. This is a neat trick I learned when I first got started in the business.
• You can decide to target new subdivisions or new construction areas because you seek to provide sellers with instant debt relief. Warning: Buying in these areas requires a certain savvy on negotiating terms.
• Military Bases or neighboring developments to military bases are strong target areas for real estate investors. It isn’t a secret that America’s finest do quite a bit of moving and most of the time their mortgage products are in the form of VA loans. These types of properties are right on time for investors that are hip to buying with no equity or negotiating short sales.

One may ask, “Why a small target area?” My answer is, “why a large target area?”

For the sake of this write-up, I will use my favorite neighborhood in Washington, DC: Deanwood NE. Deanwood is full of 4 bedroom 2 bath raised ramblers with basements ranging in value from $279,000 to $324,000. I would consider myself an expert on Deanwood real estate. You could be an expert on properties in Deanwood as well if you pulled comps for the subdivision on a daily basis. This supports what I would consider to be the greatest benefit to a small farm area – being an area expert.

If you invest in a small area; by default, you become the go to guy or gal when it comes to investing in that particular subdivision. It is much easier to reach 1000 homes 5-7 times than to reach 5000 homes 1 time. Sellers will see you as the ONLY choice for their real estate needs and that is the notoriety that an expert should expect. When targeting a smaller area, you can easily oversee projects, manage properties, time-block efficiently, avoid new relationships, keep tabs on competition, and literally specialize in that area. Believe me, if you want to take over, this is how it’s done.

Blessings to Your Real Estate Investing Business,
Milton B. Yates

Tags: learn real estate investing, marketing tips, real estate farm, real estate investment, Real Estate Market, real estate marketing, real-estate-deals, short sale

For thousands of homeowners across the country saddled with adjustable-rate mortgages, 2008 promises to be a financially challenging year as interest rates begin re-setting thereby drastically increasing monthly mortgage payments.

It is this problematic course of events in the residential market that has seen the number of foreclosures skyrocket over the past several months, with even greater increases expected in the New Year and beyond.

However, there is some hope for homeowners despite the dreary forecast of what’s to come, and as in any turbulent market, there is opportunity for investors who are willing to take some risks.

If you currently own a home that is, or soon will be, in foreclosure you have one favorable bargaining chip that should bring some level of comfort: Banks (and other lenders) don’t want to take properties back from borrowers. Why? There are two simple answers. 1.) The foreclosure process is very expensive for the lender and 2.) Banks/lenders are grossly undermanned and are not equipped to deal with the deluge of foreclosures that shall soon occur.

Recent published reports from industry insiders suggest that one very large bank, that shall remain nameless in this article, incurs an average cost of $60,000.00 in connection with initiating a residential foreclosure. That dollar amount includes property maintenance, attorneys’ fees, taxes, pay-offs to junior lien holders, etc. From a business standpoint, most lenders realize that it is wise to try and negotiate a payment plan, including some debt forbearance, with the homeowner rather than incur the expense of a foreclosure action.

Lenders lack manpower to deal with the volume of foreclosures set to take place in 2008. As a result, although most states allow the lender to initiate a foreclosure action once the borrower is delinquent 30 days on the mortgage payments, the national average before lenders take action is 7 months. Lenders just don’t have the personnel to deal with the volume in a speedier fashion.

This should be encouraging news to homeowners who have fallen behind in their payments. Many lenders are willing to recognize your financial woes (sudden unemployment, disability) and work out a payment arrangement that addresses your mortgage arrears. However, borrowers need to be proactive. Instead of avoiding your bank’s phone calls, take the initiative to communicate with your lender. It is important to be honest about your current and future financial status. Often times, the lender will accept a re-payment and/or forbearance plan that you would have never thought acceptable. Remember, foreclosures cost lenders a lot of money!

If you are an investor, then a residential market that is rife with foreclosures or soon-to-be foreclosures may represent a tremendous opportunity. Pre-foreclosures, which are often referred to as “short-sales”, allow an investor to purchase a property for an amount that is below what is owed to the bank. Although these types of transactions require specific documentation and lender approval, they may benefit both a purchaser and seller.

In a pre-foreclosure situation, the seller, who is delinquent in mortgage payments, has an opportunity to preserve (or at least reduce the damage to) his/her credit rating by avoiding a full-scale foreclosure proceeding. The buyer, often times an astute investor, may end up purchasing the property at a favorable price. Although this sounds very appealing to all parties, there are some pitfalls. Sometimes the debt forgiveness can result in income to the seller that must be reported to the IRS on a 1099 form. It can also take as long as 60 days to receive lender approval for a pre-foreclosure sale–such a long time period could affect a potential buyer’s interest-rate lock. Finally, most lenders impose strict requirements for a pre-foreclosure sale that must be met in order for the deal to close.

Whether you are a homeowner facing a foreclosure or an investor waiting to capitalize on a depressed market, there are options that will allow many to survive, and even thrive, despite the turmoil that many have predicted as 2007 comes to a close.

Tags: bank-REO, distressed, foreclosure, lender, loan, mortgage, preforeclosure, REO, short sale