Distressed Property Blog

You’ve heard me repeat repeatedly: Get into the negotiating game early with your lender. It’s easy to freak yourself past this process, but think about it… if you’re facing a foreclosure-like situation and you do not contact your lender early and often, after the foreclosure process commences, you cannot negotiate a forbearance, nor can you engineer a deed in lieu of foreclosure. In other words, a late start quickly clips options from your coupon book.

Oh, yeah, once your file lands on the lender’s attorney’s desk, you get more fees added to what you owe.

Take the following advice to heart and your lender can actually do you some good.

Your lender would really like you to stay in the home (especially if you owe more than it’s worth), rather than risk big bucks foreclosing, then wrapping the business all up with a renovation, refinance, resale wholesale, or all three. Get this; your lender would really like to find a home-loan deal that works for you both if you are capable of pulling something off that is reasonable.

In working with your lender to find a solution, they have another treat up their sleeve, called a loss mitigation department. What happens here is a loss mitigator–someone who can be a real estate broker or sometimes an attorney the bank hires–works with you and all the resources the bank can bring to bear, to keep you out of foreclosure. Yes, that is the job description. And because the loss-mitigator knows the local market, you get a real look at your property value and what’s happening to the market in your area. And if things are dire all around, this person will know that selling your home would likely mean losing money for the bank. Banks and other lenders do not like to lose money and keeping you in your house often seems to them like a much better idea.

Showing up early in the process is a good start to negotiating with your lender. Make their job easier by bringing all the requested documents and forms they request you complete. Do not scream at this person even though you feel like it. And stay credible by telling all, showing you mean to handle everything as well as possible in this tough situation for both of you, follow through when you say you’ll do something, and make sure every fact you give is accurate.

This approach got the lender to work with you in the first place, and may very well will give them  reason to negotiate a workable deal now.

A couple of weeks ago, Reuters reported that “Realtors in many U.S. states say lenders are demanding excessively high prices before allowing distressed borrowers to offload their homes in ‘short sales,’ making the housing crisis worse.”

A short sale, as we have discussed here before, is when a borrower sells a home below market price and the lender forgives the remainder of the debt. The alternative to a short sale for many distressed homeowners is often foreclosure, and in a foreclosure, everyone loses. The homeowner’s credit suffers and the price the lender can get for the property is often significantly less.

According to the Reuters story, however, Realtors are complaining that “many lenders harm their own interests by refusing to accept bids below internal targets, even though that may eventually force lenders to sell homes in foreclosure, where bids are usually far lower.” That, combined with the fact that there is workforce shortage when it comes to bank employees able to process short sales, has frustrated many potential buyers.

Ron Rosen, a REALTOR® in Lighthouse Point, Florida, was quoted in the article as saying: “The system is broken. The only question banks should ask is can they make more in a short sale than in foreclosure. The answer is that in nine out of 10 cases they will lose more money in a foreclosure. But some banks seem to be asking a different question.”

I share this with you to remind you that you—the real estate investor—should be in the driver’s seat when negotiating a short sale investment opportunity. As an investor, be confident and show the distressed homeowner and the lender you have done your homework. Be respectful but firm, and, if possible, work in concert with the homeowner. Many homeowners and lenders are in a position they never anticipated being in, and you can position yourself as the person extending a helpful hand to them. Know the market and make a strong case for your bid. Share national statistics with the lender (the nine out of 10 cases where the lender will lose more money if the property goes to foreclosure is always a good one).

It may be the case that lender’s are shooting themselves in the foot by not taking advantage of short sale opportunities. As a savvy investor, you just may be able to overcome the lender’s ineptitude by keeping “the one question” at the forefront of the discussion—“can the bank make more money in a short sale than in a foreclosure,” and nine out of ten times, the answer will be a resounding “yes.”

Don’t let yourself get out from under that house you can’t afford with a belly-flop whose splash keeps you wet for a long time—instead, get out of the soaking pool, dry yourself off, and exit gracefully. Here, I offer five ways to help remain composed and unruffled when you’ve just got to give it up.

A deed in lieu of foreclosure allows you to go to your lender and hand the deed over. Yes, you actually give back the house. Choosing the deed in lieu of foreclosure route offers several advantages to both you—the borrower—and your lender. First, it immediately releases you from most or all of the personal indebtedness associated with the soon-to-be- defaulted loan. You also avoid the public notoriety of a foreclosure proceeding and may even receive more favorable terms than you would in a formal foreclosure situation. For your lender, the advantages include a reduction in the amount of time and money they need to spend on the foreclosure process, which includes the high cost associated with repossession. Be certain, though, to pick up that all-important document that says you have made full payment with the deed.

Listing through an agent seems so straightforward; nothing could go wrong here, right? Wrong. An excellent agent might not be able to do anything with your house in less than 3 to 6 months, so keep in mind how fast your equity may be evaporating with lender fees and interest piling up. If you want to use this option, use it quick and you might come out with some cash.

Some people have enough cash-on-hand and can help you by buying your home, and they’ve figured out ways to make it work for them as a business. These smart folks are called investors. Find the good ones that care enough to get to know you, then, consider selling to the investor. Working with an investor can prove to be a lot quicker than signing on with a real estate agent, but be careful because investors are very smart and know what your home is worth more so than an average buyer led in by an agent. Two upsides here: First, the paperwork can be amazingly clean and quick to execute. Second: No fees to pay a REALTOR. In any event, if you do choose to work with an investor, be sure to hire a good real estate attorney—one of your choosing, not the investor’s—to review all of your paperwork before signing on the dotted line.

If you abandon your home there are definite dos and don’ts. If you’re definitely going to lose it anyway, do not make the mortgage payments because you will—trust me on this—need the cash. Do cut expenses by stopping the daily bleeds of all nonessential expenses. Restaurant meals? No more. The same with movies and popcorn, using the car to drive around the corner, landscaping guys, premium (or any) cable—no more! Get in touch with one of the programs in your town that help distressed people pay bills. Have a garage sale for everything you can unload because it costs something to take it with you. No time to be fancy here… unload those extra dishes and the soccer balls, too!

With little or no equity, and what I really mean to say here is–no real hope to escape with cash–and if time is short, you may be in a position to deed away your house to someone who has the cash or means to pay off creditors or make better deals with them than you can. It’s like you give a gift to someone where you are smart enough to consult an attorney to make sure your interests are protected under the law.

Last Friday, I offered four more strategies for staying in your home. As a follow-up, here’s some additional food for thought:

If you find yourself in the beginning stages of foreclosure, it may be tempting to try to ignore the problem or instead to focus on getting the cash you need to get back on track. While investing your time in a job search is definitely a good move, you should also invest some serious brain power to your present situation. What is the first thing a potentially distressed homeowner can do? Take a long hard look at your spending and consider the following:

Eliminate Optional Expenses—These so-called optional expenses may include entertainment such as cable, or they may include expenses associated with a hobby or memberships you hold in clubs and/or organizations.

Reduce Your Electrical Bill—In many parts of the country, electrical bills are skyrocketing. You can trim that bill by taking some simple, practical steps such as turning off the light when you leave a room and changing your light bulbs to energy efficient bulbs.

Reduce Other Utilities—Do you need to have long-distance service or can you use your cell phone when it’s free for all your long distance calls? Can you keep your house a bit cooler in the winter and a bit warmer in the summer? Are you paying for your water, and if so, are you conserving it as much as you could?

Keeping your house should be (right behind health care) your number one priority. It may not work, and you may reach the point where you need to consider a short sale, foreclosure or even bankruptcy, but by talking sine simple steps early on, you may just be able to save your home.

If you’re facing foreclosure or are in the tenuous stage of “pre-foreclosure,” now is the time to act. Avenues still exist that could suit you and your situation perfectly, and yes, you may be able to stay in your home. Or, as an investor, you can prevent a solid property from slipping into foreclosure and thereby gain a position that could pay off for both you and a distressed property owner.

When facing foreclosure, the seven literal keys to your kingdom are: Forbearance, Mortgage Modification, Bankruptcy, Reinstatement, Refinance, Redemption, and Lease Option. I already covered the first three–Forbearance, Mortgage Modification, and Bankruptcy–back on the 6th of March, so today I’ll cover the remaining four.

But before I do, I want to again stress the importance of knowing every last one of these foreclosure avoidance options because your day–to-day financial life, investment portfolio, and living situation can almost always be turned around using the techniques I discuss here on the Distressed Property Blog.

1. Reinstatement catches you up on past payments and any fees or penalties from the default when a lender has started foreclosure. As the homeowner, you pay back or “reinstate” everything owed. To see if reinstatement is possible, don’t wait for the bank call you. , Instead, get involved, answer calls, make those meetings with lien holders, and never ever become a puppet dancing on their strings. Ask about reinstatement today!
2. Refinance the property if you can, but keep in mind that you must have something like home equity, credit still intact, and income sufficient to cover your new, lower monthly payment. Be careful though to avoid getting scammed into a high cost mortgage just because you feel desperate. Remember: if you are unable to refinance with, the bank’s foreclosure rates go up, and that looks very bad on their balance sheet.
3. Redemption can be sweet because you have a period after foreclosure (six months to a year in some cases) to buy back your home, along with any qualified expenses you may have accrued. The secret here is gaining some time in which some saving event might happen. Often, you can live in your own home for free during this period and move out with cash stowed away.
4. Lease Option Agreements allow the new property owner to rents property to you for a set period of time, after which—you, the renter—would then have the option to purchase the home, and that option is written into the contract. Lease options also can work like a “leaseback” but in this case the buyer would set a price and determine terms for the seller to purchase the home back after a set period of time. Quite often, this option is given to people with less-than-perfect credit who would have difficulty acquiring a loan but who have a solid income-to-debt ratio.

If you thought the game was over when foreclosure looms, think again. If you remember to keep cool during the crisis and look at all of your options, you just may be able to stay in your home!

Let’s talk shop today.

Today’s advice is about active listening. No, no… this is no Oprahesque-feel-good-chit-chat / Kumbyaya-drum-circle advice; this is sales talk people, so listen up.

When you, as a person in a position to invest in a distressed property, sit down to strategize your next investment, remember that behind every distressed property is a distressed property owner. This person may have simply gotten in over his or her head because he or she threw caution to the wind and took big risks, but this person may also be dealing with some heavy stuff. I know from first-hand experience that there are a lot of distressed property owners out there that would have been able to hold it all together had some tragedy not struck. A lost job, a disease or injury, a death in the family—these are only a few of the situations in which many distressed property owners find themselves. So how does that knowledge affect your game plan?

It’s simple. Sure, you want to make money. Sure, you know the market and you know the way these things work. But don’t be a bull in a china shop. The first thing you should do is listen—not sell. Understand the distressed property owner’s situation. Be empathetic. Reassure them that you understand that even thoughtful, responsible people get into bad situations. Once you understand the distressed property owner’s unique situation, then it’s time to offer some suggestions.

This is not a hard sell approach. Rather this is you counseling the distressed home owner. Can you help them negotiate their way to a short sale where everyone wins? Explain to them the process, and gently demonstrate that you have done your homework—that you know lenders and you know the market. But most of all, let the distressed property owner know you are in his or her corner.

Once you convince the distressed property owner that you are on the same team, it will be amazing what you can accomplish together, but it all starts with being a good listener.

Have you heard about minimum service requirements for real estate brokers? If not, check this out (courtesy of the U.S. Department of Justice):

A number of states have enacted laws that require consumers to purchase brokerage services they may not want, with no option to waive the extra items. These so-called “minimum service” laws diminish consumer choice and raise the cost of selling a home.

When a distressed homeowner needs to sell their home and come out as good as they can, some states—backed by the National Association of Realtors (NAR)—require you to purchase services you simply don’t need! That’s the scenario for distressed sellers in nine states, and it further proves my point that, more often than not, Realtors are only out to protect themselves.

Homeowners—distressed or otherwise—should have options when selling, especially when they’re in trouble (and let me tell ya, plenty of homeowners are in trouble). According to the Greater Las Vegas Association of Realtors, foreclosure-related transactions accounted for 52% of all sales in the Las Vegas area last month, while for the third month in a row, U.S. foreclosure activity registered at more than 50% above the level it was at a year ago.

One tool to survive these trying times of ours is to use “fee-for-service” brokers who unbundle the entire set of real estate brokerage services and charge a fixed or hourly fee, providing only those services you need to complete the sale of your home and nothing more, unless by request.

Traditional brokers, however, have been forever bundling and selling to buyers and sellers everything from marketing the home through reviewing contracts, negotiating, locating properties to buy, arranging inspections, generating a list of comparables, shaking out financing options, drafting offer and acceptance terms, and helping with the close. This entire set includes many services wholly unneeded by the average distressed homeowner.

Say you’ve got to sell your house fast; do you want to pay for locating properties or discussing financing options if you’re going to rent until you are stable again? Heck no!

The following nine states mandate that you take the whole kit and ka-bundle, whether you want it or not: Alabama, Idaho, Illinois, Indiana, Iowa, Missouri, Texas, Utah and Washington. Another eight—Delaware, Florida, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee, and Wisconsin—have minimum service requirements on the books but give homeowners the option to not use the extra services.

Are minimum service requirements making life better for distressed sellers? No, not even close. What improves is the number of unnecessary services brokers can shove down your throat that justify the 5% to 6% fees they charge.

Minimum service laws do not ensure quality. They merely require that real estate brokers provide—and consumers purchase—more services.

Learn more by reading Competition in the Real Estate Brokerage Industry: A Report by the Federal Trade Commission and U.S. Department of Justice.

Starting on the 23rd of April, thousands of RE/MAX websites went live with “a new consumer foreclosure property search feature,” according to company officials. The new functionality is reportedly part of a strategic partnership between four independently owned RE/MAX Regions and RealtyTrac (a leading source of foreclosure data). Reliance Network, a developer of Web-based applications for real estate companies, is also involved in the partnership.

While this will serve RealtyTrac well (in that it provides a new outlet for customer reach), I am not sure how this will help the RE/MAX consumer. In reality, RealtyTrac provides nothing more than can be found in the Legal section of your local newspaper every Friday.

The vice president of marketing at RealtyTrac, Rick Sharga, says, “This new search application will pull real-time data directly from our nationwide foreclosure database and provide consumers with a method to access distressed properties.” But the way I see it, there is a serious problem here.

While a property may be on a list, that does not in any way suggest the property is actually for sale. Conversely, we are finding more and more that properties on these lists are being “cured” through multiple methods (e.g. restructuring of the loan by the lender, a loan workout, the home owner coming up with the funds which make the listing inactive, the house has already sold, or the client has already walked away and doesn’t care if the property goes to foreclosure or not). Out of these scenarios, I ask you, which one presents a buying opportunity?

The fact of that matter is that there are very few (and getting fewer) distressed properties that are TRUE pre-foreclosure and wanting to sell. In other words, RealtyTrac clearly got the upper hand in this deal.

While it may seem like a stretch to invest in distressed properties out of state, that is exactly what some savvy investors are doing. For out of state investors, buying homes in foreclosure hotspots like Detroit is, as one investor put it, like buying up “unpolished diamonds.”

In a market where “credit is tight and cash is king, an investor’s cash can go pretty far,” points out a report today on NPR. “As the U.S. real estate market falls further into decline, some cities where properties are going particularly cheap are seeing a strange revival. In Detroit, where foreclosed houses can be found on nearly every block, foreign and domestic investors are buying up bargain homes in bulk as long-term investments.”

How do you do it? Well, businesses like Urban Detroit Wholesalers specialize in helping out of state investors invest safely and profitably. “Our mission is to give you a once in a lifetime deal everyday and our buyers will tell you that this is exactly what we provide,” says company officials. “We will help you with what due diligence you need to do on each house.”

You can also look on my site, Houses.net, the first and only Multiple Listing-like Service for pre-foreclosure and distressed properties. Houses.net features thousands of homes which are ready, willing, and able to be sold to real estate investors at below-market prices, making it easy for the out-of-state investor to pick and choose the right investment properties.

Regardless of the business partner you choose to use to locate and compare properties, make sure you avoid the following foreclosure investing minefields:

1. Steer clear of foreclosure investment scams: These days there are more scam artists out there than you can shake a stick at. Bone up on the latest scams and make sure you yourself are not a victim. For more on real estate and mortgage fraud prevention, see my colleague Ralph Roberts’ blog, FlippingFrenzy.com.
2. Research the title yourself: Ask the title company to supply you with a “title commitment” and examine it carefully yourself.
3. Inspect the property yourself: Sure, you may have to fly in from out of state in order to do so, but nothing quite compares viewing such a large investment with your own eyes.
4. Invest with Integrity: Do not mislead homeowners into believing that the only option they have is to sell their property to you. Distressed property owners always have options.
5. Anticipate delays: Homeowners take their time to make decisions (even those facing foreclosure), as do the courts or trustees.

Happy investing!

Ruth Simon and James R. Hagerty take a look at why lenders may be leery of short sales in today’s The Wall Street Journal. The article is definitely worth the read.

A recent study cited in the article by Clayton Holdings, Inc. (which tracks more than $500 billion in mortgage loans monthly for investors), finds short sales “typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure.” But, according to the National Association of Realtors, short sales are only about 18% of home sales. Why are lenders leery?

The short answer is because short sales are often difficult deals to complete. “Unlike a traditional real-estate sale, a short sale requires the approval of not only the buyer and the seller, but also the mortgage-servicing company,” point out Simon and Hagerty. “In many cases, loans have been packaged into securities—which means that the mortgage servicer must consider the interests of the investors who own the loans.”

“To make the process work,” says Beth Butler, chief operating officer of Miami-based EWM Realtors, “you have to have a buyer who just wants that property and is willing to wait three to four months.” And that buyer clearly isn’t everyone.

The good news? According to the article, the short sale process may be getting easier.

“In recent weeks, some mortgage companies have begun to approve short sales for borrowers who can show financial distress but haven’t yet stopped making monthly payments,” says Dan Elsea, president of brokerage services for Real Estate One in the Detroit area.

Fannie Mae and Freddie Mac have both are actively trying to streamline the short sale process In fact, Fannie Mae will soon introduce a policy giving real-estate brokers advance indication of the approximate minimum acceptable price of a short sale.” Likewise, according to The Wall Street Journal article, Freddie Mac has given its top servicers more flexibility to accept short sales for homes backed by loans it guarantees or owns.

A brighter day for short sales? Stay tuned…