10.22.08
Posted in Short Sales at 4:12 pm by Bill Crosby
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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10.21.08
Posted in Short Sales at 4:18 pm by Bill Crosby
As promised, in these next 6 newsletters, I’ll be sharing with you an illustration of what I do to make thousands of dollars a month in pre-foreclosure real estate—using none of my own money, credit or assets. And how you can do this too. This material is taken straight from the A-Z system I work every week. But before we get into the ‘How To’s’ of Short Sales, let me tell you a little about myself and how I came to using a simple, streamlined, nearly automated system to more than quadruple my monthly income. And bear with me, this letter to you is about two pages, but it’s a quick read.
When I first started investing in real estate I wanted to learn a technique that would work no matter what the market was doing—going up, down or sideways. I realized that in order to have a system that did this, it would need to focus on “Snap Shot” deals—deals that would come together in a moment, close as quickly and leave me free of any burdens. And when done, I would need to walk away with an immediate profit.
I wanted a system that generated CA$H instantly, every time. Since I didn’t’ really know what I was doing, I also wanted something with no risk, that required none of my own money. Essentially, the only thing I would lose if a deal went south, would be the little bit of time it took me to find and negotiate the deal.
After buying a number of systems, reading a ton of books, and suffering from a very bad case of “Analysis Paralysis,” I still couldn’t really work out how to get into the kind of snapshot deals I was looking for. What made it worse, was that all the books and systems I had purchased to show me how I might do deals, in every case, lacked very essential components—the exact steps to finding, opening and closing such deals. Where was Step 1? or 2? or 3? How do I take a deal from property to payday? They don’t show you and they don’t tell you.
Eventually, through much research and reading, I began piecing together knowledge of pre-foreclosure investing. It piqued my interest and I read on. Finally, learning that there would always be foreclosures, whether the market was going up or down, I chose this area of real estate to focus on. It appeared to have all of the characteristics I was looking for:
• Great deals could be done despite what the market was doing
• I could be in and out of a deal immediately
• They had a high profit margin if you knew how to put them together
• There would always be plenty of deals available
Like me, you probably grew up hearing people talk about ‘getting their piece of the pie,’ or ‘fighting for their piece of the pie.’ And that was once my mission: to get my own little piece of the pie. But what I came to realize through working this pre-foreclosure system, is that there is no need to fight for that little piece of the pie.
Why? Because with a fraction of the energy I spent on all that fighting and getting, I learned that I could simply bake my own pie. And that’s exactly what I started to do with pre-foreclosure real estate. This is possible too, because there is little to no competition in this unformalized area of real estate. On top of that, the more I did deals, the more I discovered how valuable my work was: homeowners love me for getting them out from under their upside-down property debt; banks, who may not admit it, would rather short sell to me than have the property go into foreclosure.
And the value of my work is reflected in the big checks I cash for helping out people, investors and banks. In fact, though I had heard people talk about how much these deals could net, I thought the amounts were over-exaggerated . . . until I did my first deal, which was a simple wholesale flip that took only a few hours to put together. ‘Holy Smoke,’ I remember thinking, ‘This is some freakin’ easy money. Where has this been all my hard working life? So this is what they mean by working smarter rather than harder.’ Of course such deals had always been there, but they were just invisible to me and just about everyone else. They still are.
Now, to make a long story short, I got to the point where I got comfortable making regular deals in Short Sales, Wholesales, and Subject To’s, which meant I was through 80% of the learning curve. And that meant that I could now focus on developing a streamlined system for these pre-foreclosure deals that would give me a high, continuing income, and free up even more of my time. As a former software engineer who specialized in creating efficient, effective, user-friendly systems, developing such a system for pre-foreclosure real estate, was a natural fit.
I originally designed the A-Z system to make my own life easier, but as my work began attracting other people who wanted to learn to make money in pre-foreclosures, I basically gave them my system and did a little coaching with them, until one of my student’s, who also had bought and tried some of the books or systems out there, said to me, “Bill, your system is way better than the other stuff out there. Have you ever thought of formalizing and selling it?”
I won’t lie, I had actually thought of doing something like that, but wasn’t sure if the system could work as well for others as it has for me. But after testing it out with more students, from all across the nation, whom I mentored, and getting their feedback on what worked for them and what didn’t, I began constructing and refining the system for ‘plug and play’ use in any real estate market or territory.
Am I selling the system? Yes, it is scheduled for publication December 2007, but is available for purchase as an e-book now, at the website link below. But, am I also giving it away? Yes, you will be receiving information, lessons and action steps taken directly from the system, so that you can start getting into pre-foreclosure real estate, without risking any of your own money, credit, or assets.
Thanks for taking the time to read this. I look forward to helping you along your own path to wealth and freedom.
Sincerely,
Bill Crosby
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