Best No Money Down Ways to Buy Real Estate

By Scott Taylor

 

If you’ve been reading articles or books on Creative Real Estate Investing, you’ve doubtless heard many, many different ways to buy houses, condos, townhouse and any other real estate you can think of. These include:

Lease/Options (more correctly Sandwich Lease / Options)
Master Lease / Option for multi-unit properties
Contract for Deed (A.K.A. All Inclusive Trust Deed, or Installment Land Contract)
Subject – To
Owner Carry
Wraparound Mortgage
Traditional Purchase

Confused yet? I know that the first time I heard many of these terms I certainly was. So let’s break these down briefly, and I’ll explain what I like and don’t like about them.

Sandwich Lease / Option

This is where you (rather your company) signs a lease with an option to purchase a property. The agreement gives you the right to sublease to another. You’re the middleman leasing for a low monthly cost with a low purchase price and a long term from the homeowner, then you lease it back out for just above market rent and a future appreciated price to a potential buyer. You make monthly cash flow, and when (IF) they buy you get the difference in price. You also get a decent upfront option payment that you get to keep if your tenant / buyer moves out.

Easy, huh? Well, yes and no. This is probably the easiest way of presenting a creative purchase to the homeowner, and the easiest to explain. However, sometimes the legal aspects of a lease / option are shaky, and if you have a homeowner that won’t work with you, you could be in for issues. The key here is you have to protect yourself with the right agreements and escrow documents.

The other side is you have to know your landlord / tenant laws and make sure you follow them and that your contracts follow them. You could be in trouble if you don’t.

Given the warnings above, I’d recommend this method over anything else to someone just getting started. While there is a bit of paperwork to use to protect yourself, it’s the easiest to manage. And there can be great profits in lease / options.

Master Lease / Option

Same as the Lease / Option but with a master lease agreement that lets you rent out individual units in a multi-unit apartment building.

Contract for Deed

This is known by different names in different states. Here in Colorado, it’s an Installment Land Contract. Other places it’s an All-Inclusive Trust Deed, or a Contract for Deed. All the same, just different names.

A Contract for Deed is just what the name says. It’s a contract for the deed to a property. The contract usually involves making payments to the owner and after a period of time you guarantee to purchase the property. Whereas a lease / option gives you the right, but not the obligation to purchase, a Contract for Deed obligates you to buy.

This one’s a bit more complicated, but essentially the same as the Lease / Option. You buy it on the contract, then rent it out to a Tenant / Buyer. They usually won’t buy so you get their monthly rent, and keep the option deposit if they don’t buy.

This is my second choice for people just beginning. It’s easy to explain to the homeowner, it makes them feel like they still have some control, and they like the sound of it. Also, most title companies understand the Contract for Deed, and will do the closing for you.

Subject To

This is a much more difficult deal to get. This is the one deal where the homeowner will tell you how to buy instead of the other way around. I never have signed up a Subject-To by suggesting it. The homeowner has ALWAYS told me “just take the house – I’ll sign it over to you”.

It’s honestly sad to see people so desperate, but the sense of relief you see in their eyes when you say “okay” is phenomenal. Some people think that real estate investors are sharks, but I’ve never hugged a shark after they’ve had their way with me. I have, however, received a hug or a hearty handshake almost every time I’ve taken a house over subject-to. People are in such a bind that having someone help them out really does wonders for them.

A subject-to is pretty basic on the surface. A homeowner in financial trouble signs a deed to his or her house over to you. The loan stays in their name, and you make the payments. Under the hood, though, there are a number of things you need to do to make sure you’re protected. Putting the property in a land trust, signing the deed to the land trust, then naming your company as the beneficiary is just one of the things you need to do to protect yourself. Before you do this type of deal, make sure you have the right education and paperwork.

This is by far my favorite way to sign up houses. But it’s not for beginners. I recommend this after you’ve been investing for a year or two. Not because of the legal issues with this, but because I truly believe that you’re very obligated to follow through on this deal. If it goes sour, you’re stuck. Maybe not legally, but morally and ethically. You have to make the payments no matter what.

Owner Carry

Yet another great way to buy. However there’s one drawback – the owner almost always wants a down payment. If you’ve been investing for awhile and have the money that’s great, but if you’re just starting out and you don’t it’s probably not for you.

This one is pretty self-explanatory. You buy the house and the owner carries a mortgage. Generally this is a property that has no existing mortgage, so the owner is allowed to write you a mortgage without worrying about the due on sale clause.

Again, this is a great way to buy a property as the mortgage doesn’t show up on your credit. But you need to have the cash for the down payment.

Wraparound Mortgage

This is basically an Owner-Carry, but there is an existing mortgage on the property. The owner “wraps” a new mortgage around that and sells the house to you with the new mortgage. The only drawback of this is you have to make sure to write your paperwork so that the due on sale clause isn’t triggered. You can do this similar to the Subject-to, by putting it into a Land Trust.

Traditional Purchase

Please, Please, PLEASE don’t buy houses retail unless it’s a really great, smokin’ hot deal! Please?

Here’s how I like to buy traditionally. Buy a wreck of a house from a bank, from HUD, or from a wholesaler. Make sure that the price of the house, plus all the costs fixing it up don’t go over 80% of the fixed up value of the house.

Buy the house, fix it up, then refinance it, pull all the money out that you put in buying it and fixing it, then rent it out or do a rent-to-own. When you’ve refinance and pulled your money out, do it again. A good investor can do four or more houses a year this way. The only fly in the ointment here is that eventually the mortgage companies will cut you off and you won’t be able to buy any more. Then you’ll have to resort to the above methods. But by then you should have enough cash flow that you can pretty much sit on your butt all day if you’d like.

So to sum up:

As you’re just getting started, concentrate on Lease / Options first. Once you’ve gotten your feet wet and understand what a good deal vs. a bad deal is, move on to Contract for Deed, then finally to Subject-To. Throw in some Owner Carry and Traditional purchases and in ten years you can retire and NEVER have to worry about money again.

 

Scott Taylor is a successful Real Estate Investor, trainer and Web Entrepreneur. He has taught hundreds of students to become wealthy through Real Estate. Mr. Taylor also runs successful website businesses, and reviews Internet businesses.

Coming Up Short, More And More

Troubled Borrowers Increasingly Allowed to Sell for Less Than Loan

In short sales, closing leads and keeping your pipeline full is a major key to being successful. You’ll find that the most successful short sale investors have an overflowing pipeline full of deals. Not all deals will close successfully so if you’re depending on a handful at a time there is a good chance that you’ll have minimal success.

In previous articles I discussed some very effective ways to generate warm leads. What I want to discuss with you here applies to not only warm leads but also cold leads. Using this method in your closing will assure you not only a smoother process but also generate more warm leads.

Effectively creating a relationship with the seller or client is very important. Doing so will increase your success simply because if you ever need something from the seller they will go out of their way to do it for you. There have been times I’ve had sellers cancel their weekend plans to clean the house up for me to make sure it showed to potential buyers much better than if they left it a mess.

Creating that effective relationship starts from the moment they hear your voice and the way you present yourself either in person or on the phone. Here are some key points to remember in effectively creating that relationship:

· Connect with them and their situation

· Compliment them on making a difficult decision

· Make them feel you’re on their side

Understand that not all sellers are as knowledgeable as you are whether you’re new or experienced in shorts sales. Connecting with them by understanding their situation and assuring them that working with you will benefit them and discuss those things with them and how it will benefit them and their situation. Don’t spend the whole time talking about yourself! Spend the time you have explaining how you can help them. This time is not the time to show your narcissism, it’s time to show you understand what they’re going through and explaining the process in a way they understand related to their situation.

It is usually very hard for homeowners to make a decision like this. They’re not all bad and even though a lot of homeowners made bad decisions recently by buying or re-financing when they did, that doesn’t make them a bad person and having to uproot your family and worry and stress over where you’re going to go to live, how are you going to afford this and that anymore are hard things to deal with.

Compliment them on being brave to make the decision to move forward and doing what is probably the best thing for them at the time. Explain to them that it’ll be ok and the sun will rise tomorrow and the same great opportunities that are here today will be here tomorrow. If they have children compliment them on doing the right thing and what’s probably best for their children. Understand that it is hard for a parent to move their kids away from their friends and their school. Be sincere in your compliments and you will have created not only an opportunity to make a great payday with their short sale but also generate many more leads from the friendship you and the seller now have.

At all times when speaking to the seller/client you need to make sure they feel you’re on their side, it’s not enough to say you’re on their side, they must feel that you’re on their side! When discussing how the process works and what the bank will generally require, assure them it’s the banks requirements not yours. This usually is of importance when the need to acquire the deed from the seller is necessary because without it you cannot market the property for re-sell which may be fine if you’re purchasing it and not looking to re-sell it or “flip” it.

Use phrases like, ” the bank/lender requires ” “this is not for me”. Speak to them as you’re on the same team and have the same goal in mind. Don’t ever let them feel like they can’t trust you or give them any reason to have doubts about you, it will only complicate things and very easily you can lose the deal.

Whenever you’re face to face with the seller/client whether you’re standing up or sitting down always and I mean always stand to their side! Especially when having them fill out and sign documents. Remember you’re on their side, subconsciously when you sit across from someone you feel you’re negotiating with that person across the table or standing in front of you. Standing or sitting to their side will give them the mentality that you are their friend and they won’t have mental guards up and will probably sign anything you put in front of them.

Taking that a step further, as men we never really want to admit but our wives usually are the toughest critics and as much as we’d like to think we’re the king of the castle we’re really not. That being said you’ll usually be a lot better off sitting to the wife’s side and not the husband. Now as a man I think I may speak for many others that when in situations like this it is completely obvious that our wives are in control however we need to feel like we’re important as well, by directing your conversation toward the wife and making eye contact with the husband on a regular basis (usually while you’re shaking your head yes) will keep the husband feeling like you’re not taking advantage of his wife and will easily get and keep him to be on your side.

Remember those three techniques and apply them accordingly and you will have created not only a strong pipeline of great deals but also generate an army of referrers because they feel you treated them as human beings and not just another deal or another paycheck.

Whether you’ve been investing in Real Estate a long time or are just getting your feet wet you’ve probably realized the power of testimonials. They are used in all sorts of marketing and they’ll continue to be used because of their effectiveness. Chances are you’ve seen testimonials and read one that you felt related to you or your situation and that is I believe their intended purpose.

When using testimonials for Short Sales, I find they are extremely helpful in helping the seller/client feel comfortable with working with you. It will be hard for you to implement this strategy just starting out and I’m not sure I would risk suggesting you make up a few but as you go along I’ll bet you’ll find better success implementing the strategy I’m going to lay out for you here.

The need to have the seller/client feel comfortable with you is essential to your future success and having the seller/client refer business to you. You’ll find that as you start to build a good testimonial base you’ll start getting smart about it and show the potential sellers/clients testimonials that relate exactly or very closely to their unique situation allowing them to see that you’re able to help them out the same way you helped out the previous client.

Getting the testimonial isn’t the hard part; as long as the seller feels comfortable with you they’ll be more than happy to write a short testimonial for you to show future clients. It’s when you get the testimonial and how it’s structured that will set you apart from the rest of the crowd.

Most investors either new or experienced will most likely only get testimonials after a successful deal which is fine. I personally like to get two or three testimonials from the same seller/client at various stages of the Short Sale transaction. The reason being NOT all Short Sale transactions are successful. That being said you’re missing out on some really great testimonials in mean time that can still help you and benefit your business.

This may seem a little exhaustive and overwhelming but as you do it more and more yourself you’ll understand that it is very effective. These are the three times in which I receive testimonials:

· After successfully closing them & have signed paperwork

· After successfully receiving an acceptance letter from lender

· After successfully closing the transaction

Remember that NOT all Short Sales are successful therefore by capturing a quick testimonial you’ll still build credibility for future sellers/clients.

Keeping this within the lines of ethics, you’ll need to structure the separate testimonials properly. You certainly do not want to ask a seller/client to provide you with a testimonial saying that you were successful in completing the transaction when only initially having them sign the paperwork but rather have it structured accordingly to the progress of the process.

Once you’ve got the paperwork signed and have answered all their questions they should feel very comfortable and happy to be working with you, what a great time to ask for a quick testimonial about how easy it’s been starting the process and how they feel working with you. You’ll want to coach them a little bit on how to structure it. Start by showing them previous testimonials if you have them, if not verbally do so. Make sure it’s short, sweet and to the point. Here is an example:

—
Nick and his team have very helpful in working with us to get this process started, they have answered all our questions and have made my husband and I feel comfortable working with them. We look forward to a successful ending and are excited that we’re able to work with Nick along the way.

Mary, Glendale AZ
—

Notice that it mentions nothing about anything past that point, only that they’ve been please with the progress so far. This is an excellent example of a testimonial that does not violate any Ethics and provides credibility for future clients even though you have not yet been successful moving forward with this particular seller/client.

The same can be said and done for the next two steps. Once you get an approval you have the seller/client write another quick testimonial, this is a great time to ask for one because at this point you’ve shown your ability to get the approval and the seller/client is happy with your performance.

—

Nick and his team have shown their ability to successfully work with the lenders. We’re grateful and happy with the progress we’ve had working with Nick and his team. We know our chances of successfully getting through this are better that we have Nick and his team on our side.

Mary, Glendale AZ

—

Now we’ve only gotten so far and really haven’t completed the short sale but we have two really great testimonials for us to keep. Regardless of the short sale being successfully completed or not we’re going to be able to ethically use these testimonials for future use.

You can obviously do the same if and when you do successfully complete the short sale, cash your check and move onto the next one. However think about it if you were not able to get any testimonials and you were not successful in completing the short sale. You do not expect to get a good testimonial after failing to complete a short sale do you? You certainly don’t want your testimonials to portray that you have not been successful in completing short sales in the past.

Successfully integrate this method of getting testimonials and you’ll find yourself having much greater success than those who wait until the end to get them.

Reminder: these were only examples, please obtain your own true testimonials.

By Nick J.

 

Short Sale Negotiation Tips to Outsourcing your Short Sale Negotiations

The foreclosure process can take quite a long time for anyone real estate investor looking to close a short sale deal.  However, you’ll find the short sale negotiation is a time consuming and involved process.  Your time is valuable and you have to invest it in valuable projects and efforts.

 

 

Making the most of your time is important for a real estate investor in order to make the most profits with the least investment of time.  The way to do this is by outsourcing your work and ‘To Do’ lists.  You can outsource a lot of the short sale negotiation process to short sale services. 

 

These short sale services are companies that offer to help investors with the process of completing a short sale deal for a nominal fee.  These companies are run by or employ experienced professionals, many of whom used to work as loss mitigators for the banks with which you are attempting to make short sale deals!  They have years of experience with the foreclosure process and short sale negotiations.  So, these services can quickly and easily help you put together a short sale package, find the right person at the bank to negotiate with and even negotiate with the bank‘s loss mitigator over the phone for you. 

 

You can find plenty of short sale services to help you in your negotiation process.  They are all over the web and even in the yellow pages.  Just make sure you do your research before signing on with a particular company.  A short sale services company can offer a range of services or even have a completely different focus from yours as a real estate investor. 

 

Some negotiation companies that help with the foreclosure process actually work with the homeowner and attempt to help them keep their home.  While this is an excellent company to recommend to the homeowner who isn’t certain they want to go with a short sale, it’s not a company you want to hire. 

 

On occasion, other short sale services companies have been known to take a deal out from under the real estate investor.  This is extremely rare, but every industry does have its bad apples.  A deal can be lost when you sign on a short sale negotiation service that also works with homeowners to save their homes from the foreclosure process or when you sign on with a service that also does investing of their own in real estate foreclosures.

 

To make sure your property stays safe in the hands of the short sale services company you pick, you’ll want to research them thoroughly to make sure they only offer the services you want.  Plus, be sure to enter into a contract agreement with them, stating that they’ll only perform the services you ask for and not approach the homeowner about a deal of their own.

 

All worries about the short sale negotiation aside, outsourcing your time consuming work to a short sale services company is an excellent way to ensure you make the most profits with the least amount of time.  As long as you do your research and use a contract you’ll be safe in outsourcing that short sale negotiation.

 

Call to Action: Colin Egbert is the CEO of Real Estate Investor.com and also advises investors on ways they can outsource their Short Sale Negotiation.  Here you’ll find free real estate contracts, a real estate dictionary and a free lifetime membership!

My Short Sale Strategy

By Khayyam Jones

I have a simple strategy that I use when I want to get a short sale sold. Here is the process:

1. List the Property
2. Get an Investor Offer on the Property
3. Collect current Financials & other Short Sale Documents
4. Submit entire short sale packet to lender(s)
5. Order BPO/Appraisal and lender’s BPO/Appraisal
6. Start a “Dutch Auction” list price weekly reduction
7. Negotiate lowest acceptable net price to lender
8. Compare Highest & Best offer with lender’s approved price/value
9. Close transaction

Here is a short summary of the reasoning behind each step:

1. List the Property For Sale

The lender wants to know that we are doing everything we can to facilitate a sale. If the lender knows that it is listed and marketed on the MLS then we have the best chance of finding a qualified end buyer. They also know that the offers from a listed property represent “market value” and are more willing to negotiate a good settlement value.

2. Get an Investor Offer on the Property

Investors will always offer a low price on any property in order to get the best deal available. At this stage of the game it doesn’t matter, we just need a legitimate offer that we can submit to the lender to get the short sale process started (we are always honest and never fabricate an offer). We also want that offer to be low so that we can find the lowest acceptable value that the lender will approve.

3. Collect current Financials & other Short Sale Documents

The financial information needs to be current so it is collected when we have an offer. I have a network of investors so I know I’ll have an offer within a couple days of listing the property so I begin to collect this information immediately. The short sale documents include all the financial information to “prove” to the lender that the seller can no longer afford to keep the property and that they need to sell it. These documents also show what happened to the seller because they could afford the property when they bought it and now they can’t they afford it. All information needs to be truthful and honest.

4. Submit entire short sale packet to lender(s)

All the information is submitted in one packet to the lender. This keeps information from becoming lost and allows the process to move forward more quickly. Since most lenders are backed up with other short sales and foreclosures, the first several calls to the lender will just be checking on information and making sure that all information then lender needs has been submitted. Any missing information can quickly be resubmitted.

5. Order BPO/Appraisal and lender’s BPO/Appraisal

While almost no one does this, we order our own BPO on each property. We want to have an independent opinion of value and price. The 1st mortgage lender will almost always order their own BPO (an appraisal if the loan is over FHA limits) to establish value. With our own BPO in hand we will meet the BPO agent and show them the property and give them a copy of the BPO as a second opinion. We will point out those things which are important to the value of the property but that may not be obvious to someone not already familiar with the property. Our main objective is to get an idea of where that agent feels the value of the property will be (although they never tell us their value). We also use our BPO to send to any junior lein-holders so they are also aware of value (which makes negotiations with them go more smoothly).

6. Start a “Dutch Auction” list price weekly reduction

To get the best price available we need to have competing offers. Once the BPO has been completed by the lender we start to lower the price each week until we start to get offers on the property. If we don’t see any offers during the week we lower the price. (I like to lower the price on Thursday so that anyone looking for homes to view over the weekend will see the price change and come to see the home.)

7. Negotiate lowest acceptable net price to lender

Once all of the paperwork has been received by the lender the case/file is assigned to a negotiator who then orders the BPO/appraisal. (Note: We hold any subsequent offers until the negotiation is concluded to establish the best possible pay-off/settlement the lender will allow for the seller.) Once the BPO has been received by the lender we begin the actual negotiations. We know that the lender’s BPO value represents the price that the lender believes they can sell the property for (should they take the property back through foreclosure). We know that the lender’s bottom line is below that number because the foreclosure process is very expensive (attorney’s fees, property insurance, loan interest to Fed, selling costs, commissions, concessions, and dropping property values…not to mention the problems the lenders are having with too much bad debt on their books). Those costs generally add up to 15-20% of the property value (they can be significantly higher in upper-end homes). The lender will negotiate a value that is as high as possible but at least higher than their bottom line through the foreclosure process. Once they agree to a net value it is logged into their system.

8. Compare Highest & Best offer with lender’s approved price/value

Once we have determined the lender’s bottom line we will compare that value with our highest & best offer on the property. If the H&B offer is significantly higher than the lender’s approved bottom line then the investor will buy the property and resell it to the buyer with the H&B offer. However, if the H&B offer is not significantly higher then the lender’s bottom line then the H&B offer is submitted to the lender for approval and that buyer will close a single transaction. (Significantly higher means about 12-15% of the property value. The investor will have costs associated with 2 closings: 1% 1st closing costs, 3% money costs, 1% 2nd closing costs, 3% commission to 2nd buyer’s agent and the investor’s profit. So if the investor finds their own buyer they can reduce the sales price by 3% and still be profitable.)

9. Close transaction

Finally we close the transaction, either with or without the investor. The seller should be done with this settlement and no further negative reporting from the lender (our agreement with the lender states something to the effect of “satisfaction in full to seller”). Because the lender is writing off the “bad debt” lost in the negotiations, the seller may see a 1099 tax form which shows the lender’s loss as income for the seller. If the property was the seller’s principle residence then that “income” may be excluded from their taxes (some restrictions apply so consult your tax advisor).

Conclusion

At the end of the day this process is not 100% successful. However, it is a process that gives the seller the best chance of getting an approved short sale from their lender that is sellable in today’s market.

About The Author Khayyam Jones is a real estate investor and Realtor in the State of Utah. He specializes in distressed property investments including fixer-uppers, foreclosure/short sales, and small infill development. Website: http://KhayyamJones.com Blog: http://utahrealestateinvestor.blogspot.com

This spring, real estate sales began picking up in many U.S. markets as buyers snatched up homes at depressed price levels. But not all sales have been proceeding smoothly. As a rule, sales involving foreclosures and short sales take longer than usual to close because of their inherent complexity.Still, they represent a significant portion of sales activity. In February, these transactions made up 45 percent to 50 percent of all sales, sometimes more in parts of the country where the foreclosure rates were particularly high, according to the National Association of Realtors.

How can you get in on a good short-sale deal? It takes a certain amount of fortitude and patience, plus a lot of luck.

Selling a home for less than the amount the current owner owes the mortgage company is called a short sale.

Buying a home that is a short sale is different from buying a property that is actually owned by the bank, known as an REO, or real-estate owned property, or a property that is in foreclosure.

A short sale can be a good deal for a buyer, and it can help the seller avoid having a full foreclosure on his or her credit record. Although a short sale and a foreclosure negatively affect a seller’s credit score, in a short sale the damage can be minimized if the homeowner can persuade the lender to report the debt to credit bureaus as "paid in full."

In a short sale, the proceeds from the transaction are less than the amount the seller needs to pay the mortgage debt and the costs of selling. For this deal to close, everyone who is owed money must agree to take less — or possibly no money at all. That makes short sales complex transactions that move slowly and often fall through.

A recently announced extension of the government’s housing rescue plan could make it easier to buy short-sale properties. The new version of the Making Home Affordable plan will pay lenders up to $1,000 if they allow a short sale of a property when the owners don’t qualify for loan modification because they owe too much money on the home. The program will spell out a short-sale process and provide standard documents, the U.S. Treasury says.

Before you rush in, consider the issues. The advice below comes from Scott Thompson, senior vice president of Mortgage Resolution Services, a distressed sales consulting company, and Vicki Vidal, associate vice president of government affairs for the Mortgage Bankers Association.

Under the best circumstances, short sales take a long time to close and may require extra effort on the part of the buyer, Thompson says.

Find a real estate professional who understands the territory. Having a real estate agent on your side who knows how short sales work and who has negotiated others will increase the chances of closing the deal.

"I would ask the agent to provide references, specifically on an REO or a property that was in short sale," Thompson says.

Thompson and Vidal advise staying away from "short-sale counselors," those who say they can jump in and expedite the deal. Their game often involves negotiating a low price with the lender, charging the buyer more money — often significantly more money — and pocketing the difference.

If you’ve decided to go for a short sale, here are some items that most lenders require from a short seller:

A hardship letter. The seller must explain why he or she cannot continue making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won’t be approved, but a seller with cancer, no job and an empty bank account may.

Proof of income and assets. If the seller has money in the bank, including retirement funds, it is unlikely that the lender will let the debt slide. This package of information must include income tax and bank statements, going back at least two years.

Comparative market analysis. This document shows that the price of the property has declined and that the property won’t sell anytime soon for the amount owed. This packet of information should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close.

A list of liens. There may be more than one, so determine how many liens are on the property. The good news is that since late 2008, the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold.

The bottom line: Don’t choose a short sale if you’re in a hurry. "It’s a waiting game," says Vidal.

Part of what slows down short sales is buyers’ insistence on making really lowball offers, she says. "You get really crazy, ridiculously low offers — and they are rejected."

Mortgage rates soared across the board, with the 30-year fixed ascending to its highest level since November 2008.

The average 30-year, fixed-rate jumped 30 basis points, to 5.95 percent. A basis point is one-hundredth of a percentage point. Rates have risen 71 basis points in three weeks.

This week’s average 15-year fixed rate — a popular option for refinancing — leapt 31 basis points, to 5.37 percent.

The average jumbo 30-year fixed surged 28 basis points, to 6.96 percent.

Adjustable-rate mortgages also rocketed upward. The one-year, adjustable-rate mortgage rose 15 basis points, to 5.16 percent. The popular 5/1 ARM jumped 29 basis points, to 5.49 percent.

(Distributed by Scripps Howard News Service. Reach Jennie Phipps at editors(at)bankrate.com)

June 10, 2009
Andrew Kirk, Park Record, Park City, Utah

Park City Board of Realtors president Lincoln Calder is concerned about misunderstandings regarding short sales. The term is often coupled with foreclosure in reference to housing crises, but a short sale is a process very different from a foreclosure.Better understanding of the term could help home owners realize their full options when considering foreclosure and help buyers be educated consumers when looking for deals in the current market, he said.

Adding to the confusion, the concept of a short sale is fairly new and the process is different for every mortgage lender.

Basically, a short sale is getting the mortgage holder to agree to accept less money than is owed through the sale of the home to an outside buyer. This differs from a foreclosure in that the home owner is the one selling the home instead of a bank taking possession from the owner and selling it themselves.

The name comes from the owner being “short” in paying off the bank and the closing costs, explained Mark Seltenrich, president-elect of the Board of Realtors.

Typically, banks lose big in a foreclosure. They lose less in a short sale. An owner’s credit is destroyed in a foreclosure, less so in a short sale. Seltenrich said it “nicks” their credit.

There’s no standard way for banks to report short sales to credit agencies, so there’s no way to predict what the impact will be, but it will always be better than a foreclosure, he said.

It’s a better alternative all around, but it’s a complicated

process, Calder explained.

“It’s kind of the Wild West out there,” he said.

Short-sale transactions are the most difficult. Foreclosures are actually easier for Realtors, he said.

Sellers

Who should consider a short sale? The answer is a home owner whose mortgage is more than the value of the home and who is having trouble making the payments.

“It’s important for owners to understand how to qualify,” Calder said.

Because banks must approve of the short sale, they require home owners to prove they are incapable of paying the difference on the loan.

Before considering this process, an owner should first seek a loan modification, Seltenrich said. If an owner is incapable of making their payments, the problem is often temporary like the loss of a job or a salary cut. A modification can lower monthly payments. The federal government’s “Making Home Affordable” program can help owners lock in those lower rates permanently.

But if the inability to make payments cannot be solved, short sales are a good option, he said.

Because there are no standard requirements or rules, sometimes banks make the home owner repay the difference on the loan at a later date. They let people out from underneath the mortgage payment, but they don’t let them off the hook.

Because the process is complicated, Calder recommends hiring a qualified real estate attorney to give good advice.

Buyers

Buyers need to be fully aware of what a short sale means because the purchasing process takes much longer and is much harder than a normal real estate transaction.

Short sale has become a bit of a buzzword in the industry, Calder said. Some buyers are thinking they’re a place to look for a good deal. Yes, they will be priced less than market value, but they will not be half that value or some other major reduction. Banks want to get as much of their money back as possible and will not want to negotiate much lower than market value.

Seltenrich said he has a buyer who is being patient because he loves the home, but the bank has taken more than 12 months in considering the offer. The seller is in no hurry because they haven’t made a house payment in 18 months but are still allowed to live there until the bank makes its decision.

“There’s no light at the end of the tunnel,” he said.

Other Realtors are reporting similar problems and the National Association of Realtors is trying to lobby the government to standardize the process and require decisions from banks in a more reasonable amount of time.

But if a buyer has the time to be very patient (8 weeks is not unrealistic just to get a response to an offer, not necessarily an acceptance or rejection) and is working with experienced Realtors and attorneys, a short sale could save them money in the long-run, Calder said.

Because banks are accepting the offers to lower their own risk, they prefer cash payment or large down payments, according to Realtor magazine.

Another problem to be aware of, Calder pointed out, is that willing sellers will often agree to perform improvements or concede to less for work that needs to be done. Banks will sell properties “as is” in short sales.

The Basics of Foreclosure "Short-Sales"
by Attorney William Bronchick
________________________________________
You will likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes at close to or more than the property is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to a "short pay" or "short sale."
Negotiating a short sale with the lender is a difficult process, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s "Loss Mitigation Department". More than likely, each lender you deal with will have a separate name for this department, so be patient when calling. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. Once you get in touch with the right person, then the negotiating begins.
From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process – attorney fee’s, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting less money now.
The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or "BPO"). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with "bad news" may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!
The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a "hardship letter", which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.
Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the "net cash" to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of closing. You can prepare your own HUD-1, and simply write "preliminary" on the top.
Don’t be surprised if your first short sale bid is rejected. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you steal. Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes – if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.
The process of the short sale is not that complicated, but the success or failure of the deal depends upon how you present it to the lender. Many novice investors and realtors give up at short sales quickly because their first deal is rejected. Like any business, short sales takes practice to get good. Generally speaking, loss mitigators are pretty good at spotting an amateur investor. If you know what you are doing, the loss mitigators are more likely to make a deal with you.
Want to become an expert at short sale deals? Register for William Bronchick’s upcoming Foreclosure Investing Boot Camp.

It’s plastered on billboards, bus stops, and cars: “Stop foreclosure! Avoid bankruptcy!” Behind every call to action is an investor with an eye on today’s booming pre-foreclosure market.  His acquisition strategy of choice: the short sale.

With a short sale, you purchase the property directly from the distressed homeowner subject to the lender accepting less than what is owed on the mortgage.  Without a doubt, this is a marvelous tool for buying properties at fire sale prices.  How does 40 to 80 cents on the dollar sound?

Here’s how it usually works:  The homeowner has missed payments and is in default.  He owes, say, $115,000 on a property worth $100,000.  You step in and negotiate the payoff down to $70,000.  You buy the property for the negotiated payoff amount—and end up with $30,000 in instant equity.

You may be wondering: Why wouldn’t the lender just foreclose on the property? Remember that banks are in the business of lending money, not accumulating properties. The foreclosure process itself can be lengthy and expensive. And there’s no guarantee that the property will sell at auction anywhere near fair market value, if at all.  Considering the cost of foreclosure, the holding costs, and the resale costs if the bank winds up with the property, taking the discount early on is often the smartest route.

Investors who have mastered short sales have a clear advantage in today’s marketplace.  Lenders are flooded with delinquencies and are willing to take deep discounts to expunge bad paper from their books. Perhaps most rewarding, short sales and note purchases provide a fresh start to strapped homeowners who would otherwise slide into full-blown foreclosure or bankruptcy.  In this day and age when so many investors are just out to steal folks’ houses from them, short sales and note purchases offer a true win-win-win outcome:  the homeowner gets out from under the foreclosure without filing bankruptcy; the bank saves a tremendous amount of time and money on the foreclosure and possible marketing of the home; and the investor acquires the property at a very handsome discount.

Note Buying vs. Short Sales

No form of real estate investing is without challenges, even the beloved short sale. Any number of obstacles can complicate or even kill your deals.  But there is a way around the pitfalls of the pre-foreclosure market: buy the defaulted note from the bank.  Quite simply, when you buy note, you become the bank, which means you make all the rules.

The numbers generally work out the same. As in the previous example, you would purchase the note for $70,000.  At that point, the lender is out of the picture and you are in control.  There are two principal exit strategies in note purchases:  the homeowner executes a Deed in Lieu of Foreclosure and you take possession—or you restructure the note and the homeowner retains the property and makes payments to you.  Note that 99% of the time you would want the homeowner to vacate the house. After all, if he can’t make payments to the bank, why would he suddenly be able to make them to you? You would want to restructure the note only if the homeowner is solidly back on track financially, which is rare.

Eliminating threats

Since you are now the bank, you make all the key decisions about issues that could potentially kill a short sale:

 

• You decide whether to pursue a deficiency judgment against the homeowner.
  

• You decide whether to allow an assignment of contract.
  

• You decide how much cash the homeowner can get back. 
  

• You decide how much cash junior lien holders get at closing.
  

• You decide whether the homeowner can stay in the property.
  

The last point is crucial.  Many short sale advocates claim that you can keep the homeowner in the property on a lease option or land contract.  Don’t do it!  This tactic is often used by unscrupulous investors to steal the homeowner’s equity.  As a result, more and more states are enacting laws against these “sale/leaseback” schemes.  In other states, courts have declared that sale/leasebacks are loans in disguise.  Unless you have a license to lend money, you would have a serious problem.  To compound matters, if your deal is deemed to be a loan, your profit may be construed as usurious.  The only legal way to let the homeowner stay in the property is to buy the note and restructure it.  

Simplified deals

With a note purchase, you are buying an asset from the bank, not doing a workout between the bank and the homeowner. Your submission package is considerably lighter—no pay stubs, bank statements, tax returns, or hardship letters from the homeowner. You simply need to know the bank’s bottom line and deliver the cash. The closing boils down to two primary documents: the Assignment of Mortgage executed by the bank and the Deed in Lieu of Foreclosure executed by the homeowner if you are taking possession of the property.

Buying the note also makes it easier to sell the property to an end buyer at closing. Many title companies are shying away from simultaneous closings because they want to avoid getting involved in any illegal property flipping schemes. Since you are not flipping a property when you buy the note from the bank, most title company underwriters will allow you to do a simultaneous closing. Plus you only pay one set of transfer taxes, a delightful perk that can really pay off over time.

Furthermore, your end buyer can obtain financing regardless of his lender’s seasoning requirements.  Many lenders require the previous owner to be on title for at least 90 days, which can be a major obstacle to short sales. But if you opt to buy the note and you become the bank, you can now permit the homeowner to sell the property directly to the end buyer on a short sale, thereby eliminating the 90-day seasoning issue. As the bank, you make your money by receiving the payoff on a note that you purchased at a hefty discount.  

When the deal is done, most investors don’t want to broadcast their profit.  But that’s exactly what happens with a short sale. The sale prices are public record, freely available on the Internet and elsewhere.  Both the homeowner and the end buyer know exactly what you paid and what you pocketed.  Note purchases are not a matter of public record. Only the bank will know what you paid for the note and the bank could care less what you do with its castoff paper.

Many lenders are completely up to speed on selling their delinquent notes.  Others are still finding their legs. As foreclosures increase nationwide, more and more banks are recognizing that individual investors are prime outlets for bad paper. For now, the wise strategy is to go for the note purchase every time, and use the short sale as your fallback position.

The bottom line is that both short sales and note purchases serve the pre-foreclosure market well by providing a winning outcome for all parties.  Unfortunately, there are a number of obstacles that may sabotage your short sale deals.  To stay in the driver’s seat and eliminate these obstacles, simply buy the note instead. When you buy the note, you become the bank, which means you make all this rules.