My husband and I started doing short sales back in 2008. He had branded him self as the San Diego Short Sale Kid. He was very blessed to be mentored and still by 2 amazing local Carlsbad investors here who have done over 500+ deals.
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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Over the last years, events have unfolded that have reminded me of an important truism in real estate investing. "Always have a back-up!"
The market is the last couple years is very competitive as you already know it. Many times, where I thought I had a deal locked up to have it crumble before my eyes. Don’t ever stop prospecting for more deals. If you feel like you have something solid don’t stop prospecting to manage that project. Hire it out. Your main role as real estate investor is to continue being the entrepreneur and don’t stop prospecting for deals.
I tell this story to illustrate that it's absolutely CENTRAL to your business to have back-up plans in all aspects of the business.
I strongly recommend having two or three:
- Hard money brokers
- Appraisers for quick value assessments
- Rehab crew leaders
- HVAC techs
In fact, have two or three of any trade or profession lined up, ready to spring into action as a moment's notice. Sure, I have my favorites in each of these areas, but I am striving to have 3-deep hot back-ups in each. Thing happen. Life happens! Be prepared for it.
Don't stop there. Have back-ups when you rent or sell a property. A property isn't rented until the rent and deposit (or lease/option fee) is paid and the keys are in the hands of the new tenant. So, encourage back-ups until the money is in your hands (in cash).
I've had appointments set up to sign leases, and the potential tenants never show up, no call, and they quit answering their phone. This is despite being hot for the house an hour earlier! If you are in this business long, you will learn that people will disappoint you and they will fool you. So, establish policies and make one of them "it ain't rented until it's paid for!"
Encourage back-up offers to purchase. Deals fall through all the time! Take as many back-up offers as you can.
Having back-ups is a mental frame of mind that fits within being a big-picture thinker portion of the Mind of the Real Estate Investor. In addition, rearranging your core team is thinking big and long term. It's a constant process of improvement and adjustment. This approach is crucial to your business! Apply this principle and profit!
Gisela N Sanchez
Gisela N Sanchez
San Diego Realtor
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