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More strategies for handling short sales

Tips on working with lenders, protecting seller’s credit

Friday, October 06, 2006

By Bernice Ross
Inman News


I recently spoke in Brighton, Mich., which is about 45 minutes outside of Detroit. Michigan is experiencing a very difficult buyer’s market. Prices are decreasing. The auto industry is experiencing massive layoffs. Many Michigan sellers lack sufficient equity to close a transaction. As a result, short sales have become an unpleasant fact of doing business. If your market is slowing down, you may be facing some of the same issues listed below.

Who is the decision maker?

Most lenders sell the loans they originate on the secondary market. In fact, it’s common for a single mortgage to be sold and resold several times. When you have a short sale, one of the greatest challenges is locating the person who has the power to approve the short sale. If you are aware that your sellers are going to lack sufficient funds to close their transaction, don’t put the property on the market until you have confirmed that the lender will work with you to close the short sale. If you cannot obtain this confirmation, don’t waste your time or money marketing a property that you will not be able to close.

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How to cope with the tax consequences of a short sale

Be adamant that your client seek the advice of his/her CPA or tax attorney before proceeding with a short-sale transaction. In most cases, the amount the lender reduces the seller’s payoff is considered to be forgiveness of debt. This amount is normally taxable. If the seller has little or no income, there may not be any additional tax liability. Only a tax professional can make this determination. On the other hand, failure to report the forgiveness of debt as income may result in charges of fraud and/or tax evasion. If the IRS discovers this, it can file an IRS tax lien on any of the seller’s assets. The IRS has the power to deduct money from any of the seller’s bank accounts without the seller’s consent. Furthermore, IRS tax liens are difficult to expunge from the seller’s credit report and can take months to resolve. Again, do not enter into a transaction until the seller has examined all the legal and financial ramifications of taking a reduction in his/her loan balance.

Should the seller stop making payments?

It seems counterintuitive that most lenders will turn down your request for a short sale if the seller is currently making the payments. The only time they will consider a short sale is when the seller is delinquent. This presents a particularly difficult dilemma. Sellers who keep their payments current are protecting their credit rating. On the other hand, if they cannot do a short sale, they cannot move. Avoid advising them what to do because ultimately it’s their decision. Instead, refer them to a tax attorney or CPA who can advise them of their options as well as what they can do to minimize they negative impact on their credit.

No one realized that the seller wouldn’t have enough money to close

If you originally thought that the seller would have enough equity to close the transaction, and the offer the seller accepts comes up short, be sure to allot sufficient time to negotiate with the lender. Since it can take 90 to 120 days to conclude a short-sale negotiation, don’t begin this process unless the buyers are willing to wait that long to close.

Buyer’s best offer is $10,000 under the amount necessary to close

If the lender refuses to negotiate a short sale, one option that can protect the seller’s credit as well as helping you to close the transaction is to ask the lender to make a $10,000 personal loan to the seller who can pay it off at $100 or $200 per month. While the seller may resist this idea at first, it can actually result in a considerable savings when he/she applies for future loans or credit cards. If the seller has a delinquency on his/her home loan, a much higher interest rate will be charged on future purchases. For example, assume that a borrower with excellent credit pays 6 percent for a fixed-rate loan. The borrower with a foreclosure or delinquent payments may be required to pay 8 percent. On a $200,000 loan, the difference in interest payments would be $4,000 in the first year, or $12,000 in three years. Clearly, it’s better to payoff the difference rather than having a default.

Seller is moving up and doesn’t want to take less for the property

Assume the seller’s present property is worth $200,000 and he/she will be purchasing a property for $300,000. A 10 percent decline in value means that the seller’s current property has declined by $20,000 whereas the property he/she is purchasing will have declined by $30,000. This translates into a $10,000 benefit on the new purchase. A similar strategy works for those who are transferring to an area where there is appreciation. Each month the sellers hold out for a higher price, the properties in the area where they are transferring are increasing in value. Consequently, they will have a double negative — a declining value on their present property and increasing values on their future purchase.

If you’re in a down market, these issues may be on the horizon in the near future. Nevertheless, short sales can be a lucrative source of business, provided you have the negotiation skills to navigate through the maze of difficult issues you will encounter.

(Special thanks to Regina Benson and Nancy Bohlen of PreferredProperties.com in Brighton, Mich., for their contributions to today’s column).

Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of “Waging War on Real Estate’s Discounters” and “Who’s the Best Person to Sell My House?” Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 RealEstateCoach.com

One of my favorite REI Sources is Cameron Dunlap, a serious REI in NY, who coaches many people in buying and selling houses.

I hope you enjoy his article here…..

All the best to you,

Brian

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In a “Buyer’s Market”, where houses sit with little activity and prices stagnate or fall, it’s VERY easy to get great deals.

You can buy so cheap and so often your head will spin. It’s simple to get really good deals because they’re everywhere.

Then… your challenge is to sell but that’s easy too, when you know how.

I’ll address this here. This is where conventional wisdom steps in and will convince you that the opportunity ends… if you let it.

What most people don’t know is that if you are aware of the market conditions and, you know how to play the game, either type of market is good. It’s just a question of knowing how to do the business in the current, given, environment.

Think about the current market.

Sales have slowed, prices have leveled off and in some cases are falling and what this has caused is for many investors that have been in the business for the last few years to loose heart and in many cases GET OUT!
That’s good.

The fact is, if you don’t know what you’re doing, this market and what’s likely to follow doesn’t look good at all.

If you do know what you’re doing this market is the most exciting you’ve seen in a good 7 or 8 years and the best part is…the competition is leaving! Buh Bye!!!

So, no matter what anyone tells you… take it from someone who’s seen the cycles and been to the school of hard knocks. This is about the best time to get in or be in the business as is humanly possible.

Don’t listen to the untrained doomsayers and certainly don’t try to convince them they are wrong. Let them leave. Let them get out of your way and my way.

Think of the law of supply and demand. It ALWAYS prevails.

If foreclosures are up, houses are staying on the market longer and in general supply is up, that’s good.
Then consider all the untrained (I call them $9 book pinheads) investors that are leaving because properties are no longer appreciating 35% per year. Demand is down appreciation has leveled off and that’s good.

It all equates to more GREAT deals for you and me.

It’s important to realize that in this environment, appreciation is all but a fantasy that you can’t count on. I learned this when I got in the business in 1993, when appreciation was a bonus if I was lucky. It was a time when appreciation pretty much didn’t exist.

In the absence of appreciation, we make up for it by buying better.   Getting better deals. You know the old saying… “You make your money when you buy”.

While it’s true that you get your pay check when you sell, that old saying REALLY holds true in a Buyer’s Market. You’ve GOT to buy right.

Ok, so now to the burning question in your mind.

How are we going to sell?

If it’s simple to find great deals but it’s hard to sell. How are we going to see the big bucks?
Easy.

In every Buyer’s Market, you’ll need to plan to sell in one of the following 3 tried and true ways, and you will cash in while others are bailing out.

First is on “Quality”.

  1. Meaning you rehab the house and the others like it on the market, and make it pale by comparison.

The few qualified buyers in the market will want your house because it’s the best one in their price range and in the area.

2.   Or, on “Terms”.    Meaning we take payments on the house and focus on folks that have credit problems and can’t go to the bank.   We use a Lease Option or Seller Financing.

Think about this. Every borrower that loses their house to foreclosure because their ARM adjusted them right out of the picture is now a potential buyer for the houses you sell on terms.

3.  Then there’s “Discount. Meaning we sell the house at below market value and beat the competition by being cheap.

This can be the case when we’re wholesaling Junkers to rehabbers or when we’re selling houses that are in good shape but don’t qualify for the “quality” angle.

An example being we take the deed from a seller who’s house is pretty but that we are not going to rehab.

So, 1. Quality, 2. Terms or 3. Discount. Pick one.

Focus on those exit strategies and buy according to the one that fits the property and the deal and you’ll ROCK this business at a time and point where your $9 book pin head competitors are jumping like rats from a sinking ship.

To to summarize…

  • DON’T listen to conventional wisdom, it’s a trap for the broke.
  • DO look at today’s market as one of the greatest opportunities we’ve see in years.
  • DO make sure you buy RIGHT, there’s just no excuse not to. It’s a Buyer’s Market!
  • DO be sure to decide how you’re going to sell before you make your offer.
  • Then finally… DO get going.
  • This business is outrageously profitable and outrageously doable, regardless of the market conditions at any one point in time, when… you know what you’re doing.

So get trained and get in the game NOW!

Your timing couldn’t be better.

Cameron Dunlap
www.CameronDirect.com
A Free Resource For Real Estate Entrepreneurs

Seller Financing and Lease Options It is all about the TERMS of the Deal – If you can not get the PRICE low, get great TERMS – Good with little equity or sellers who can wait for their cash – Exit Strategy is either Sell It or Keep It – Create No Qualifying Financing for YOURSELF or YOUR NEW BUYER.