What is a short sale and how the heck do I buy them?

Hi everybody and welcome to short sales 101! Before we jump into the world of pre-foreclosures I would like to talk real quick about our big move and some real estate statistics. As a lot of my readers already know I have left Windermere Real Estate and opened a real estate brokerage called Extant Realty Inc. I have owned this company for a couple of years but now we are putting our full brokerage business behind it as well as multiple other companies that fall under the real estate and real estate investment umbrella. Extant Realty will cater to real estate investors and add services that investors have never found under one roof! Extant Realty is “The Real Estate Investment Headquarters!” Visit us at http://www.extantrealty.com/
Okay so there is my announcement of our real estate investment brokerage, now let’s talk about our market, where there is some good, bad and interesting. Certaintly more than you can say about the stock market.(*See my last blog post about using your 401K or IRA to invest in real estate!) Overall I think the real estate market in Eastern WA and Northern ID is predictable and encouraging. Here is the biggest number to chew on, 29%. That is the drop in home sales we saw in 2008 in Spokane County. I don’t know about you but I think that number looks huge! As big or small as it may look it is actually not nearly as bad as half of the middle metro cities across the nation. I do however think it is safe to say the number takes its toll on the industry. How about some good news? Inventory is down 8.5% compared to the end of 2008! In fact there are about 100 less homes on the market right now than there was in January 2007! Those are very positive numbers. On the down side median home prices dropped to their lowest level of 2008 at $170,000 in Spokane County. This is a drop of 7.8%. One of the big reasons for the drop in median home price was the influence of foreclosures and motivated sellers on the sold home prices. As the inventory continues to burn off and activity of buyers begins to increase (and it has!) our market will slowly but surely come back around. I know I have said it before but I have to say it again 2009 is the year to buy some real estate!
Alright time to talk about short sales! What exactly is a short sale and how the heck do I buy them? Two questions I will answer; in fact at the end of this article I will even offer 2 short sale deals to the first two qualified investors who call or e-mail us at the end of this blog.
What is a short sale? A short sale is when the seller owes more on the property than it is worth and the bank allows them to sell it and short the note on the property. So if they sell their property at its market value, it will not be enough money to pay off the lender or the note(s) on the property. So to be able to sell the property to a paying buyer the seller is going to have to “short” the bank. Another way to say it is the bank accepts an amount that is “short” of the balance owed. This may need to be done on one, two or in some cases three notes or mortgages on the property.
Why would the lenders except significantly less of a payoff than what is owed? Well for a couple reasons. As for any mortgages behind the first mortgage(i.e. the second), they are not likely to get anything if the property goes all the way through the foreclosure process. It is very expensive for lenders to go through the foreclosure process. Also, banks are not in the real estate business. Their overhead of foreclosed homes is through the roof (no pun intended). The last thing they want is another foreclosure property in their profile costing them overhead(a.k.a non-performiong asset).
I heard short sales could be bought for way under market value, is that true? Absolutely!
Investment tip # 32, spend your time and offers on motivated sellers!
A bank who has not been paid on vacant or beat up home, facing an expensive foreclosure is a motivated seller. They key is to know about what the BPO (Broker Price Opinion) is going to come in around. The bank uses this to help establish a value for the home. There is a certain percentage that the lender will come off the BPO and sell at a discount to avoid the foreclosure process. Also taken into consideration is the property condition and amount of repairs for the property. The banks don’t want homes with any problems. We can typically find a little mold somewhere to send in to them:)! So you want a low BPO, justifications for the BPO being low i.e. repairs, and a nice discount on the property.
What type of discount can I expect on a short sale? It really depends! A home buyer buying something to live in is going to probably be willing to pay a little more than an investor purchasing for a fix and flip. It also depends if there are competing offers. But in my experience the typical discount in our area is 15-35% discount off market value. Want a real life example? I did a short sale in Liberty Lake WA in December. The home was in a very nice PUD with almost nothing wrong with the property. The amount of the 80/20 loan was $480,000. Previous market value of the property was well over 500K but the market has hurt this area of high end homes quite a bit. I found some new homes down the hill from this one selling for really good prices. Still the market value of this property the day we did this deal was between $425,000 - $475,000. I was able to sell the property to a home buyer (I used another Realtor to bring the buyer after my first one backed out) for $350,000!!! That is around $100,000 discount off approximate market value! Then the bank paid fees to sell including excise tax, commissions to me and the other Realtor. So in the end they accepted around $323,000 on their $480,000 note!
Okay, so how do I buy a short sale or pre-foreclosure for a nice discount? The first thing you are going to need to do is talk to the seller who is in default or their Realtor. You will want to interview these parties to see what their knowledge of short sales is. To be able to get a good discount on a short sale the lender is going to need a very comprehensive short sale package to consider the offer. This package needs to contain information on the property, comparables, income information, listing information as well as a hardship letter. Some lenders will send you their short sale package with a list of every single item you need. Make no mistake; the package needs to be fully complete for the short sale to work. You will also need to try to help the BPO broker on justifying a lower price through repairs, market conditions, etc.
Once you negotiate out a price that works the lender will send you a conformation letter stating what they will accept has a payoff. At this point you typical have only 30 days to completely have the deals closed. There can of course be many different issues that come up along the way, requiring extra paper work, signatures, quit claims, inspections and a variety of other things. Each situation is typically unique.
Key Points
· You need to contact the motivated seller in default (through Realtor if listed)
· You need to make sure the seller will be able to put together a full package for the lender that can be sent in a reasonable amount of time.
· You need to tell the story of the seller and the home condition and poor value.
· You need to execute. This means close the deal!
A lot of beginning investors decide they want to go into short sales and pre-foreclosures. I don’t blame them! Especially in this market! But I would highly recommend spending a good amount of time getting the right education to do this type of real estate investing.
If that sounds like a ton of work and time IT IS! A short sale or pre-foreclosure is typicaly at least twice the work of a normal transaction. That is after you find the short sale transaction! So my recommendation? Use a professional, licensed service to find, negotiate and help close your short sale or pre-foreclosure transaction. A company like Extant Realty will take you through the entire process and provide all of the resources you need. We are able to get very large discounts because of our experience and systems we have in place to negotiate with the banks efficiently. We also have systems in place to bring a lot of these transactions in the door. This virtually eliminates all of the work for the buyer by us putting these deals together. What is our fee to do this? In most cases FREE! The bank pays us our fees! In some circumstances we get such large discounts that additional buyer’s fees are charged but they are typicaly 3% or less. Not bad for a 30% discount on real estate! Even extremely educated real estate investors utilize our short sale services. This allows them to do more transactions and know they are taking advantage of the most recent market opportunites.
So I said I have two short sales available and I do! One is a 3 bed 1.5 bath in north Spokane. Similar properties in the area sell between 110K-130K. Short sale price will be approximately $80,000! $7,000 in estimated repairs (including finishing the basement bathroom), but very rentable or livable right now.
Other short sale is a true rehab! Ugly is good, huge discount to be had here. Probably needs estimated repairs and junk removal $15,000. Home has a new roof, lots of square feet and mostly vinyl windows. Comparable homes sell for 120K-140K. Approximate short sale price $70,000.
Give a call to 509-926-4018 or e-mail tyler@ExtantRealty.com if you are interested in this property and want a buyer’s packet.
Hope the info. Was good, as always call or e-mail with any questions! Happy March.