DEAN GRAZIOSI: DEAN GRAZIOSI REVIEW – REAL ESTATE FEED BY DEAN GRAZIOSI

While everyone knows that careful planning and saving are essential elements of home ownership, there can come a point where unanticipated situations can drastically change one’s ability to continue meeting financial obligations.  At such times, the dreaded, all-too-familiar fear of “Foreclosure” can become a very real possibility.  Among other negative consequences, a foreclosure can seriously damage one’s credit history and decrease the likelihood of qualifying for future loans and financial assistance.

However, for those who plan to give up their homes, there are alternatives to foreclosure. One such option is the Short Sale.  

Essentially, a short sale is a sales transaction typically granted by a bank for two reasons:  the seller has experienced unforeseen hardship, and/or the seller owes more on the mortgage than the home is worth.  While unemployment or reduced income, medical emergencies, and divorce are among the most common sources of hardship, it is essential for homeowners to communicate the details of their specific circumstances to their lender in order to determine hardship.

1.    Once the lender has agreed to work with the seller in pursuit of a Short Sale, the seller will be required to prepare a financial package including some combination of the following:

·         Letter of authorization, which lets your agent speak to the bank.

·         HUD-1 or preliminary net sheet

·         Completed financial statement

·         Seller’s hardship letter

·         2 years of tax returns

·         2 years of W-2s

·         Recent payroll stubs

·         Last 2 months of bank statements

·         Comparative market analysis or list of recent comparable sales

2.    Once the bank receives the financial package, the bank can take the following steps:

·         Bank acknowledges receipt of the file. (10 days - 1 month.)

·         A negotiator is assigned. (30 - 60 days.)

·         A Broker Price Opinion (BPO) is ordered. This is essentially an appraisal of the property.  

·         A second negotiator may be assigned. (30 days.)

·         The file is sent for review or to the Pooling Service Agreement (PSA). (2 wks - 30 days.)

The bank may then request that all parties sign an Arm’s-Length Affidavit.  This is a document created by the bank to prevent sellers from committing mortgage fraud by transferring title to a relative and profiting from the short sale.

·         The bank issues a short sale approval letter.

A few things to keep in mind:

·         If the financial package is not complete, the short sale process will be delayed. In this event, the bank might even shred the package.

·         Prompt submission of a complete financial package does not necessarily mean a prompt response from the bank.  It is imperative for the listing agent to regularly call the bank and keep careful notes of the short sale process.

Ultimately, a short sale is a beneficial option for homeowners to get out from under their mortgage without liability for the deficiency. In addition, homeowners also avoid damaging their credit with a foreclosure or a bankruptcy.

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RealtyTrac indicates that real estate agents should expect short sales to account for 50 percent of their sales through 2012.  Projections are for 3 million foreclosure filings by December 31^st 2010 and another one million REO’s by the end of the year.  These are staggering numbers by anyone’s count. 

If you listen to successful investors, you will hear a consistent theme.  That idea is to lead the field, not follow it.  Investors who make the greatest returns often buy into seemingly bad markets and turn big profits as the markets recover.  You may want to observe how Warren Buffett invested during the shock waves of 2008.

As RealtyTrac suggests, the down market is here until unemployment improves and buyers gain confidence in the stability of real estate investments.  Those days will come and that is the time that real estate investors want to be going against the grain again.  Real estate investors always need to be reminded to buy low and sell high.  Buy in down markets and sell in up markets.  That’s the simple formula.  There s no emotion, no getting attached; simply buy low and sell high.

The formula is obvious but it still takes courage and planning to yield the big profits that make the risk worthwhile.  If the investor is entering the short sale market, a team of experts is needed.  That team should consist of an attorney, an accountant, a real estate agent who really knows the ins and outs of short sales and a general contractor. 

The coordination of these working parts can assure that you are buying low and responsibly.  The agent brings you potential properties, the contractor estimates needed repairs, the accountant crunches numbers, the attorney approves the contract and may assist in some negotiations and you are involved in every aspect of each expert’s work.

In addition to bringing you potential properties, the agent should also be scouring the market for qualified tenants.  After the house is repaired, you will want income to defer the expenses.  Lining up potential clients and qualifying them ahead of time is one of your biggest responsibilities. Imagine how comfortable you will feel with a property purchased low, an attractive mortgage and a ready willing and able tenant.  Remember that when the market turns up, you turnover the keys in a profitable sale. 

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In case you missed it, we are in the midst of a protracted short sale buyer’s market.  The end is not in sight and from the lender’s side; the situation could get worse long before it gets better. 

Investor’s quickly realize that each short sale is different. Lenders have different policies for short sales.  While there are now government initiatives to aid both the seller and the lender, some lenders have a difficult time accepting short sales.  Like it or not, the value of residential real estate has declined significantly in the past two years.

Lenders can point at appraisers or even their own credit departments, but in 2007 very few Americans foresaw the fact that 14.6 million people would be out of work by 2010.  Lenders also have difficulty admitting that their lax credit policies including low doc loans and zero down payments have put them in this position.

Well, it has happened and 33 percent of all transactions involve distressed housing.  In fact the investor’s short sale offer may seem like a slap in the face to the lender but that offer may be the best price they will see.  Basically, the short sale offer is the bird-in-hand theory and it should be presented as such.

By accepting the bird-in-hand short sale offer, the lender avoids taking title and being responsible for maintenance, homeowner association dues and taxes.

However, to present the bird-in-hand rescue plan, the investor must do his part.  Make sure you have all the cash you will need to cover the down payment, various inspectors, closing costs and escrow in addition to the funds needed to restore the property.  Do not expect the existing lender to help with this transaction.  They simply want out.

Before the investor starts looking, make sure a pre-approval letter for financing is in place and that it has at least a six-month commitment.  Armed with that letter and all the cash you will need you are ready to go out and invest in a short sale.  The seller and the lender will not share your enthusiasm, but remember, you are their bird-in-hand and if they do not like it, there are other lenders and sellers who will.    

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At the beginning of December, the Treasury Department unleashed some pretty powerful initiatives to expedite and encourage the influx of short sales.  As many as 33% of pending sales reported by the National Association of Realtors, are short sales.  Unfortunately many of these sales fail to close.

This trend has caused the Treasury Department to take a hard look at the process.  The most glairing breakdown in the system is the prolonged amount of time these transactions take.  Investors get discouraged and move on.  There are plentiful supplies of short sale housing.  With each failed short sale, the existing inventory of homes for sale continues to grow and lowers values of other properties.

The Treasury realizes the need to strengthen the real estate market and cut into the over-abundance of existing inventory.  In 2009, 500,000 short sales have been completed.  More than twice that number of short sales has failed to close.

The new plan is designed to assist homeowners who do not have the income or debt levels to capitalize on the government-backed $75 billion loan modification program called the Making Home Affordable.

To qualify for short sales assistance, the subject property must:

·                     Be the homeowners principal residence

·                     The mortgage must be delinquent or default must be in the offing

·                     The original loan had to be issued prior to January 1, 2009

·                     The homeowners total monthly mortgage payment must exceed 31% of their before-tax income

The short sale seller will receive $1500 to help offset moving costs.

Short sales are preferable to foreclosure because while they will affect the borrower’s credit rating, the negative effect on lasts about two years.  Meanwhile, neighborhood property values are not as negatively impacted as if a foreclosure had taken place. 

Lenders are finding short sales save them money as they do not have to go through the expensive foreclosure process.  While not the chosen result, the new short sale program should benefit all parties.   

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Opportunities are out there.  Great ones.  Are you ready?  When the short sale knocks, will you be ready to open the door?  Like all investors, real estate investors are thinking ahead and are in a position to move at lightning speed.  Building a savvy, experienced short sale team of experts is a wise decision that can reap big profits and facilitate the short sale process. 

The ideal short sale team consists of the investor, a financial backer, an accountant, an attorney, a certified home inspector and, of course, a licensed real estate agent.  Short sales can have legal and tax repercussions.  Avoid any surprises and engage the accountant and attorney in the process early.  A half hour of advice can facilitate the whole transaction.  In any case, every short sale purchase agreement should contain a one week period for attorney review.

Before you move on any short sale, the buyer should always insist upon a home inspection.  Check all vital systems such as plumbing, electrical, roofing, heating and cooling, foundation, paving and siding as well as termite and/or infestation inspections.  Every seller, including the mortgage holder, will respect the buyer’s right to a physical inspection.  A one week contingency can prevent a lot of hardship down the road.

The real estate agent is the critical component on your short sale team.  Spend some time with the agent and understand the agent’s responsibilities.  The investor should detail the overall investment plan, specific property criteria and property types that are not of interest.  Meet with the agent periodically.  These sessions will serve as the agent’s marching orders.

Increase the real estate agent’s effectiveness by creating a letter of authorization permitting the agent to discuss properties and investments on your behalf.  The letter should contain the date, investor’s name and address and any contact information and all the same information for the agent. 

When the agent finds the ideal short sale opportunities, authorize the agent to contact the lender and procure all financial information about the property.  While the attorney, accountant, agent, home inspector and financial representative are on your team, remember that it is your investment.  Check all reports relative to the short sale.

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