08.31.08
Twitter Updates for 2008-08-31
- Watch the sunrise over the mountains this morning, more beach, kayaking and bonfire tonight #
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08.30.08
Twitter Updates for 2008-08-30
- Awesome day in Saugatauk, just took a hike, going canoeing next, followed by beach & sea kayaks #
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08.29.08
Twitter Updates for 2008-08-29
- Foreclosure letter day, 200 to go out to pre-foreclosure home owners, office will do so automatically & they are calling 200 more people #
- Getting ready to go to family camp this weekend in Saugatauk, MI. Kids run wild, bonfires on the beach every night, wonderful time for all #
- 12seconds - Getting ready for the weekend http://12seconds.tv/channel/billcrosby/21325 #
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08.28.08
Twitter Updates for 2008-08-28
- Just got out of the gym. Taking care of mind, body & spirit in order to have success based clarity. As well, I get my daily reading done.. #
- My reading this morning was Dan Kennedy’s Sales Success book, absolutely essential for anyone who wants to be in the Real Estate business… #
- Have a look at one of our new products, beautiful 3 flat condo project: http://tinyurl.com/5ms7tj #
- Just posted the first of my 15 part series on Pre-Foreclosure real estate investing http://poprl.com/YQ #
- Going home for the day, but going to stop by one of our projects, a 3 unit gut rehab deal, all brick, really beautiful property #
- Another project we just started, a 3 unit brick gut rehab project, killer property as it will cashflow like crazy when done http://poprl … #
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What is a Short Sale?
What is a Short Sale?
A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for.
A short sale is when a bank, Mortgage Company, or other lender accepts a reduction on a mortgage amount to avoid a foreclosure or bankruptcy. The basic premise leading to a short sale is when somebody owes about what the property is worth, or they owe more than what the property is worth, usually because the value of property has dropped in that area since they purchased or refinanced the property. The value of the property is determined not only by the market but also by the condition of the property: so, it could be a property in a good location, but it is in a state of neglect or disrepair which puts it’s value below it’s mortgage balance; or it could be a nice property, but all of the other nice properties, the comparables, in the area are selling for less than the balance of the current mortgage against the property because of a downturn in the real estate market. So, when a property has no equity, it creates a perfect opportunity for a short sale.
But, why don’t people just sell the property and pay off their mortgage? Well, if they don’t have any equity, then they won’t even have the ability to pay a Realtor her or his commission. They could try doing a for sale by owner (FSOB), but they won’t even have the ability to pay closing costs, real estate taxes and other costs, meaning that they would have to pay these through money from the new buyer. And what new buyer would want to buy a property at or above market value and then pay extra for closing costs and taxes? They wouldn’t, which is why the property can’t be sold on the open market.
Furthermore, if the property owner is already in foreclosure and behind on their mortgage payments, they might have additional taxes that are owed and they might have interest and penalties that have been tacked onto the mortgage because the mortgage could potentially be going up at this point.
As of the writing of this book, this very scenario has been happening in abundance simply because a lot of people have been taking out 100 percent loans: meaning 100 percent of the value of the property. Some lenders were even loaning 105 and 110 percent. And there you have a great recipe for a short sale deal: a lender (out of greed? Over-optimism? Myopia?) has loaned 110 percent on a property that has gone down in value. So short sales are a great opportunity in a really slow market because when somebody comes up against a hardship of some sort, or their mortgage balloons, and they no longer have the ability to pay the mortgage on a home that is worth less than what they bought it for, then they just want to get out from under that burden, but they don’t know how and they feel trapped.
Here are some scenarios that create distressed situations for property owners: they lose their job, or a spouse loses a job, or there is an extended illness in the family, or there is a short term disability which turns into a long-term disability, or there is a divorce and the one person remaining with the home finds that they cannot pay the mortgage, or the unforeseen burden of medical expenses severely impacts income. Whatever the cause, some people have found themselves over-debted, overburdened and overextended, and they find that they can no longer afford to pay the mortgage. And because the mortgage is more than the value of the house, they are denied the ability to sell the house on the open market and thereby get out from under their burden.
This creates not only an opportunity for you to help such people get out from under their burden, but it is a perfect opportunity for a creative investor to come in and do a short sale. Now, the action behind a short sale is that, you, as a creative investor, are going to come in, help save the homeowner from foreclosure and offer the bank less than what the face value of the mortgage is to date. Here’s an example: a homeowner, who is in a distressed situation, has an existing mortgage of $200,000. You write an offer to the mortgage holder (usually a bank) for $140,000, which is accepted as full payment for the outstanding loan. And in so doing, you have then created $60,000 in equity. This is a short sale.
Why are banks willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction that they would be better off taking the discount beforehand and be finished with the headache of it all.
At the end of a short sale, you now have equity in a property that had none. The homeowners are pleased, since they can move on with greater freedom and ease with their lives, and the bank has a defaulted loan off its books. Real estate short sales are a win-win for everyone involved.
That’s all for today. Look for the next email where I share about Priming Short Sale Negotiations with distressed homeowners.
Happy Investing!
Bill Crosby
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