Depending on your area, many times it is not that hard to find a great real estate deal. In some areas you’ll see 20 to 50 percent as distressed sales. Even with this type of market, there tends to be an elite class of properties that stand out among the distress category.

It could be because of location, condition, price or terms that cause these types of properties to be stand outs and it is in this category that I’ll share some secrets as to how to get them.

PART I

Short Sales

Based on price these seem to be one of the most attractive categories to pick from. Not only that, but there are so many of them. The problem with short sales is that it comes with a HUGE contingency. It is subject to the lender’s approval.

That means the buyer and seller can agree on the price and terms, but it means nothing until the bank approves it. Many banks have a loss mitigation department and their objectives can be quite different from the seller and buyer.

Tip 1

One key is to work with approved short sales . That most likely means an offer was submitted and the bank had approved that offer and for some reason it fell out of escrow. The buyer and seller already know that the bank will accept the price they did previously. This helps a lot when looking to purchase short sales.

Tip 2

It’s a numbers game. Most experienced short sale agents do not think much of the first offer(s). The Listing agent knows it just starts a process with the bank and that statistically the buyer will end up finding another property instead of waiting 4 to 12 weeks for a response. In this case, a second key is to recognize that purchasing short sales is a numbers game and it usually takes about 10 offers to equate to 1 close. Play the game correctly and you’ll have a valid chance at owing some really good properties.

Tip 3

Think in nets. Usually, a good story and a strong qualified buyer with a large down matters to sellers and is essential to getting your offer accepted. With banks being so overwhelmed with loan defaults, the standard mode of operation is the path of least resistance. The primary indicator that they use is what they will net from this sale. So when making offers, look to see how you can show that the bank will net the most from working with you.

Tip 4

You MUST have an agent team that is aggressive in follow up. Remember, your offer may be used just so that the Listing agent can start talking to the right bank department or person and you can easily be ‘forgotten.’ I can think of over a dozen stories like these from other agents in the past 2 weeks! Follow up is a must and you need to have someone who has the resources to do it.

Tip 5

Keep your deposit check. There is no reason to open escrow when such a major contingency exists. You can not tie up the property by being in escrow. Let’s say you open escrow and wait 8 weeks. In that time 4 other offers come in and are presented to the bank. The bank can accept another offer even if you are in escrow.

Tip 6

Work with an experienced team. Don’t get sold on what an agent can do for you, have them prove it to you. That’s right – if you miss this step you can waste a lot of time. Many agents do not have successful experience in this area, transact too infrequently or do not have a team.

Experience

If they are learning on you then you could be paying too much or missing out on the best deals. Ideally, you want someone that has been through a market cycle before, is working fulltime and has no other occupation. They should have specialization in what you are looking for. An easy way to tell is to look at their business card. If they are not even trying to brand themselves as an expert in the category you want, then why take that chance working with them.

Transactions

They should have no less than 10 qualified active buyer clients. If you are the only one or 1 of 3 then you should run. If you needed to do brain surgery, would you want a doctor that does 1 every 6 months or see the doctor that has 1 to 2 surgeries every day. There is safety in crowds and working with an agent that doesn’t have a strong active client following in your category is a huge indication to ask a lot more questions.

Team

If they do not have a team (a real team) that can service you then there is really no way you can find the best deals. The reason – it takes a lot of hard work. This is not rocket science type of hard, more like ditch digging hard. If you want a Grand Canyon real estate steal then you need to have an agent team that can throw their resources behind you.

Caution, don’t get tricked by a franchise name thinking familiar is better, because the reality is that all of their agents are independent contractors and the ‘team’ may be nothing more than promotion and not the ditch digging hard work needed to win the best real estate deals.

The best way to find out is to ask who is on the team, what do they do and how will they service you.

In the next series we’ll talk about how to get the best REOs on the market.

How Low Will They Go?

People have a major misunderstanding of what they expect to accomplish when trying to purchase distressed or bank owned property. I emphasize trying because those same people end up never buying anything.

So how low will the bank go on a short sale or REO? If you’re hoping for a number, you can stop reading. If you’re hoping to steal the property, you can stop reading. If you’re hoping to buy property for 50% of market value, you can stop reading. If you’re hoping to wait and buy the property for less by dealing directly with the bank, you can stop reading.

There are four things you need to understand: 1) The bank only accepts short sales when they believe it’s in their best interest! 2) Banks do not voluntarily accept losses. 3) Banks will always try to limit their losses. 4) Banks know the fair market value of the property.

These four are in no particular order. If they were, number four would probably be number one. I talk to people on a daily basis who want to make offers so low, I can only assume they think the bank has no idea what the property is worth. Don’t be so naive. The bank has a legal obligation to get the highest amount possible for any property. The bank can even be held liable for the difference if they are negligent in approving a sale that is too far under fair market value with no justification. Stories of someone picking up a property at 50% of market value are either urban legend or missing critical factors that played a part in the purchase.

You Can Get Good Deals In Distressed Real Estate

Yes you can. Just be realistic. If you think you can purchase real estate at a 50% discount, you’re not realistic. There isn’t one single situation, no matter how desperate, that would cause an owner to sell their home for 50% under market value when an experienced Realtor can sell that same house for 30% under market value in the same amount of time under the same conditions. Anyone who tells you they did is leaving out part of the story. However, it is very possible to buy distressed homes at a 25% discount. Anyone who tells you a 25% discount isn’t a good deal, doesn’t know real estate or investing in it and you’d be better off steering clear of the real estate advice they have to offer. As a matter of fact, a 25% discount on anything you buy, whether it be gasoline, groceries or a car, is a great deal.

I see so many people that won’t buy unless they can get it for no more than 60 cents on the dollar. They pass on property that’s 25% under market value. Big mistake, here’s why:

Let’s assume there are 10 properties with market values of $100,000 each. 9 of these homes can be purchased for $75,000 each (25% discount) and one at $50,000 (50% discount). This is a fair ratio for illustration purposes. In the real world, it could easily take you more than a year to wait it out for the 50% discount. It’s very possible that you never find something discounted that much.

Investor A buys the 9 homes for $75,000 each

Investor B buys the 1 home for $50,000

Assuming a 5% annual appreciation for each property, this is what each investors real estate portfolio would look like 5 years later:

Investor A’s Equity = $473,653 ($100,000 original FMV x 5% annual appreciation x 5years – $75,000 purchase price x 9 properties)

Investor B’s Equity = $77,628 ($100,000 original FMV x 5% annual appreciation x 5years – $50,000 purchase price x 1 property)

Investor B’s strategy to wait for the great deal cost him nearly $400,000. He made the mistake most amateur investors make; focusing on only one thing – discounted value. Investor A created wealth through leverage. Professional real estate investors know that leverage trumps discounted value every day of the year. Leverage is so powerful, had Investor A bought all 9 properties at full market value ($100,000), he still would have equity of $248,653 or triple Investor B’s investment with a 50% discount. In this market, you can buy real estate at a 25% discount all day long and maybe never find the 50% discount.

Top 10 Tips For Purchasing Short Sales and Bank Owned Property

1. Be realistic. Reread the tale of two investors above if you still don’t understand how being unrealistic can and will cost you dearly.

2. Get off the fence and get in the game. If you’re waiting for the market to drop, reread the tale of two investors above to remind you of how much waiting can cost. Learn more about timing real estate markets here: Secrets for Timing The Real Estate Market

3. Know the true market value of your target property.

4. When making an offer, be able to support the amount of the offer. Pulling a low ball number out of thin air isn’t going to work. If you don’t understand why, reread the four things you need to understand in bold type above.

5. In a short sale, the bank will only accept your offer if it’s a better alternative to foreclosure. This means that the bank will take the fair market value of the property in its current condition, subtract the costs of foreclosure and selling it as an REO, and the "fudge factor". The "fudge factor" covers the costs that will accrue if the bank has to take the property back at foreclosure and includes lost opportunity, risk of vandalism of the vacant property after foreclosure, declining market risks and time to sell as an REO. The "fudge factor" will be the only area the bank will be willing to negotiate. This is the supporting amount mentioned in tip #4.

6. In REOs, the bank can be more "motivated" during certain times of the year. They will generally be more likely to entertain low offers at the end of the month, quarter and year. The banks want to get real estate off their books and these calendar targets can create motivation. But remember, be realistic. Just because it’s nearing the end of the year, doesn’t mean the bank is going to jump at an offer that’s ridiculous.

7. Having access to REOs before they are listed can give you a big advantage. How do you get this information? Here’s one way: Hawaii REO Bargains

8. Don’t get emotional or stuck on any property. Real estate investing should be run like a business. Keeping emotions out of it allows you to make rational decisions.

9. Understand and accept the risks involved with these types of properties. To get the good deals, you will have to accept risks involved with them.

10. Retain the help of an expert Realtor with experience in these types of properties to help you. Don’t think you can do it yourself. That mindset can cost you thousands. Besides, as the buyer, you don’t pay for their services.

Hope this helps. Until next time, happy house hunting!

Elliot Lau

Complete File Free Orange County Foreclosure List.

Update List April 28

I am underwater and I can’t afford my house payment. How do I qualify for a short sale?

In most cases, you don’t need to “qualify”. However, there are criteria that lenders use to evaluate selling via a short sale. Usually, a poor financial outlook for the seller is compelling to any lender to cooperate and approve a short sale.

Number 2

When I sell the property as a short sale do I have to pay income tax?

Always consult your accountant or tax attorney to confirm. As of this writing, the Mortgage Forgiveness Debt Relief Act of 2007 will allow you to sell short and not have income tax issue.

Number 3

Who pays the property tax?

That depends on the seller’s financials and the lenders policies.

Number 4

I don’t have money to pay the agent’s commission. What do I do?

The bank will pay the commissions and sometimes back taxes and closing costs. They evaluate each situation to determine what they will pay and if they will hold the seller responsible.

Number 5

I’m behind on my payments and want to know who long I have before losing my home and how long it takes to sell a home as a short sale?

Legal timeframes for judicial and non-judical foreclosures and vary from state to state. A good video to watch about timing and short sales can be found here.

With regard to the short sale, there would be 2 parts. One is getting an offer from a buyer and the second would be getting an approval from the lender. For the first part it would vary on your price, market pressures in your area and marketing. The second part can take 3 to 8 weeks for an approval.

Number 6

Can I sell my home without the approval of the Lender for a short sale?

No. The lender would ultimately have to approve it because they are forgiving the debt. Better to get this approval up front when possible.

Number 7

Can I only do a short sale if I’m behind on my mortgage payments?

No. Based on recent lender policy changes, many have already started to accept short sales from sellers that are current.

Number 8

Can I still do a short sale with a second mortgage?

Yes. Both lenders will need to agree in completing the short sale. Although it can be more difficult. In many cases, the second lien holder gets nothing so they don’t have much to lose if it goes to auction. Some companies have a stated policy as to what they will take or do and some first lien holders may even pay the second.

Number 9

Why isn’t the mortgage insurance helping me?

Mortgage insurance is to protect the lender and allow them to meet lending guidelines so that they can allow loan amounts to exceed 80% of the value of the home.

Number 10

Will a short sale hurt my credit score?

Yes. It will have a negative impact. However, the severity should not be as bad as having a foreclosure.

Brian Laughlin

Click below for a free list for Orange County REO Report

Orange County REO List

Click below for a list of Notice of Trustee Sales for Orange County

Orange County NTS List

Click below for a list of Notice of Defaults for San Bernardino

San Bernardino NOD List

Click below for list of foreclosures for Hawaii

Hawaii Foreclosure List

Updated List 4/8/2008 – See Updated

Email

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I wanted to personally thank you for attending our Broker Preview Feb 13th.
I trust that the Short Sale information was valuable.

As a follow up to the loan limit increase news yesterday…it sounds like next Friday at midnight we will have our engines in place to begin originating in the new loan limit world. There is much to assimilate to in this ever-changing market atmosphere in which we serve, but I and my troops are dedicated to be a harbor of stability and committed to being a part of the solution. I will focus on personalized service for each individual client and all of my Premier Realtor Partners. Please feel free to pass along my contact information to your top clients that may want to discuss these recent events and the impact it may have on their mortgage financing options. I can also provide market updates weekly or monthly if they want to be a part of my Mortgage Market Update campaign.

The latest issue impacting interest rates now is the continued freeze of the secondary markets. Here’s what I understand so far: The Secondary Market for both Conforming and Nonconforming Hybrid ARMs is nonexistent.
Yesterday morning IndyMac tried to sell their hybrids. Because there were NO bids, they were forced to pull them off the market. UBS, one of the largest traders of Mortgage Backed Securities traded 70 cents on the dollar for their hybrids just to try and get them off of their books. In short, companies are flooding the market with hybrids that none are willing to buy. Due to this severe dislocation in the secondary market (there has been for some time, but this week it’s become much worse). Two investment firms, Thornburg (super jumbo investor) and the Caryle Group defaulted on a number of their financing agreements yesterday and this morning. That means these firms must de-leverage/liquidate their mortgage holdings in a large fashion. The impact of these sales into an already ill-liquid secondary market is putting tremendous strain on interest rates, and it particularly applies to conforming and nonconforming hybrids. It’s not so much due to credit performance, but a lack of buyers and an excess supply of mortgage debt.

I’ll keep you posted as I receive more information, but I can tell you that our competitive position is being addressed as a top priority at the highest levels within our organization. It is a good time to make certain your valued clients are connected with a professional mortgage consultant who is aware of what all is happening in today’s local and global economic theaters. My team and I are always available for private consultations.
If you need me to address your troops corporately, please get with me and I’ll make time on my calendar to attend one of your weekly routine meetings.

Have a great day!

To find out more info on lending you can check out www.awnow.com