They taught us very well on SHORT SALES. A short sale is simple. If you have a property that's worth $150,000 and let's say it has a first mortgage for $100,000 and a second mortgage for $40,000-what that means is the total debt on that property, or the total mortgages, is $140,000. Being a real estate investor, I wouldn't want to buy a $150,000 house for $140,000. It doesn't make sense.
A short sale is when you get the bank to not take $140,000, you get them to take less, like $85,000. The banks are going to do this for several reasons. First, they're going to have a lot of expenses that are associated with a foreclosure. They're going to have realtor's costs, foreclosure costs, holding costs, repair costs-they're going to have all sorts of fees associated with a foreclosure.
Inevitably, the bank is only going to recoup somewhere around 70% of the value of the property. That's why banks will take short sales on foreclosures. The natural follow-up to that is, “Why are foreclosures such a hot commodity right now, and why is there a lot of buzz about them?”
The thing is that a lot of folks may recall this brief refinance boom we've been going through, which is important. People went out and got a lot of mortgages called “Adjustable Rate Mortgages,” which have an extraordinarily low interest rate to start, let's say 3% in some cases. But in a couple of years, maybe two to five, depending on the term of the Adjustable Rate Mortgage, their rate is going to go up, it's going to adjust upward.
So, people went out and bought more house than they could normally afford, or they refinanced, got the low payments, and bought a car that they couldn't afford if their payment had to adjust upward. What's going to happen here in the next two to five years is that all these ARMs are going to be adjusting upward, and that's critical because people aren't going to be able to afford them.
They aren't going to be able to afford them because they didn't count on it, and because inflation is outpacing wage growth. All of this sounds great, but you may say, “How is that going to affect my business?”
Here's the way it affects your foreclosure real estate business. If you're in a judicial foreclosure State, where properties that are in foreclosure go through a judicial process before a foreclosure is complete; or a non-judicial foreclosure State, where the properties go through a trustee as they're going through a foreclosure-you're going to see less and less equity in these properties.
So if you know, like I said earlier, that banks are going to take short sales because of the numbers-meaning they have to pay all of these expenses-and the foreclosed properties aren't going to have a lot of equity in them, you have to be able to negotiate short sales effectively if you're going to be working in the foreclosure market.
The foreclosure market represents the most motivated sellers. Traditionally, with motivated sellers, you'll find good deals. That's why banks are going to take foreclosures on the conditions that are spurring on all these foreclosures. It's an amazing phenomenon that we're working on right now.
Folks might also ask about a common [inaudible]. Well, what if we're in a real estate bubble? If we're in a real estate bubble, that means values are going to go down, which means folks are going to owe more than what their property is worth. Again, negotiating short sales is going to be critical to your success in the foreclosure business. If we're not in a bubble, that's fine too.
We already [backed out] the numbers; still negotiating short sales is going to be critical to your real estate business because people are borrowing up to, and sometimes above 100% of the value of their property. Whatever way you slice it, as far as having a skill, negotiating short sales is probably, in my opinion, one of the most lucrative skills that someone can have as a real estate investor.”
The make it or break it to short sales is that BPO/APPRAISAL meeting. Make sure you meet that person with what I call AMMUNITION which is your own appraisal, property inspection report, termite report, sex offender/crime reports in the area, 2-3 estimate of repairs, and title reports showing title encumbrances. Basically, you’re going in to meet the appraiser like an attorney and your job is to make your case on why the appraisal needs to come in around your offer price.
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