Tag Archives: Real Estate

Walking Away from a Foreclosure & Strategic Defaults – 60 Minutes

The other day 60 Minutes ran another report on “Strategic Defaults” as they are called – home owners who are underwater in their mortgage and walk away from their home (causing a foreclosure) even though they have the ability to continue with mortgage payments.

The most interesting thing about the story was a University of Arizona paper entitled “Underwater and Not Walking Away: Shame Fear and the Social Management of the Housing Crisis”  (Typical University title for a paper!)

It’s a fascinating read if you have some time.  We can debate all day long the ethics of home owners walking away from their obligations, but the fact that it’s happening isn’t in dispute – and real estate agents, investors and other professionals should be thinking through the ramifications of it for their business.

Most home owners don’t realize (or maybe don’t care) that there are many alternatives that are much better than a foreclosure – a loan modification or short sale are all much better alternatives to giving up and walking away.

Here is the 60 minutes segment

Distressed Home Sellers are 29% of Home Sale Market

According to the “Distressed Sales Activity” report from First American CoreLogic, First American Core Logicdistressed home sales are on the rise again, accounting for an amazing 29% of all home sales in the month of January.

Nearly 1 Million distressed sales occurred last year, which includes short sales and real estate owned (REO) property.

Distressed property sales are at their highest levels since April of 2009.

Expect to see this trend to continue – there is still a lot of pent-up housing inventory in the system, banks are finally starting to liquidate their REO portfolios faster, and there is a strong focus on completing short sales quicker.

Real estate agents and investors should keep their eyes on the distressed property numbers, this will be a very large part of the market for the next few years!

What is a Short Sale?

A short sale is the sale of real estate in which the sale proceeds fall short of the balance owed on the property.

It generally occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a loss is better than foreclosure.

Both parties must consent to the short sale process, it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower. It is becoming a common practice as so many home owners owe more than their house is worth.

In a short sale without recourse, the lender does NOT pursue the home owner (borrower) for the forgiven debt.  Otherwise the lender may sue the home seller for the difference between the sales price of the home and the remaining loan balance.

Example Short Sale:

Steve bought a house for $320,000 and financed the property with an 80/20 loan.  He got a loan for 80% ($256,000) from one lender, and a second loan for 20% ($64,000) from another lender in order to 100% finance the property.

A year later Steve has lost his job and can no longer afford his house payments.  He’s 3 payments behind and is headed towards foreclosure.

Steve decides to sell his house and downsize.  Unfortunately, property values have fallen in his area and the real estate market is slow. He receives an offer for $205,000 to buy his home.

Since Steve still owes $320,000 on his house, he must either come up with the difference ($115,000) in order to sell the home, or request his lenders accept a short sale.

Because he is behind in his payments and the lender does not want to foreclose, the first lender (the 80% lien holder) might agree to discount their loan to $202,000 (a $54,000 discount) and the second lender  (the 20% lien holder) might agree to discount their loan to $3,000 (a $61,000 discount).  The second lien holder typically gives a much larger discount because if the first lender forecloses on the property, the second lender gets nothing, while the first lender gets the property.

With both lenders agreeing to discount their loans, the house is sold for $205,000 and foreclosure is avoided.  The home sellers will not receive any funds from the sale, and typically must prove a hardship (lost job, divorce, etc) for the lenders to agree to a short sale.

In general the IRS does not tax forgiven debt from a short sale (contrary to many reports).  See the IRS Home Foreclosure & Debt Cancellation site.

As long as the short sale is without recourse, the lender does not pursue the borrower for the difference between the original loan amount and the discount and the debt is forgiven.

HomeFlux – Motivated Home Sellers Seeking Agents

Over the past few months we’ve been re-launching our Motivated Home Seller brand for real estate agents – HomeFlux.com.

It has been exciting to see how agents are rapidly growing their business through focusing on motivated home sellers – a segment of sellers that is rapidly growing, and is incredibly under-served by most real estate professionals.

With thousands of distressed home sellers contacting us each month, the success stories are pouring in from agents all over the United States and Canada who are listing and selling these properties in a very short period of time.

One agent called the other day and said the 3rd contact he received turned into a $1.4 million dollar listing and another broker has converted 46% of the motivated home sellers contacting him into listings!

If you are an agent or broker and not currently focused on the distressed property market, I encourage you to make it a part of your business plan.  This is a multi-billion dollar segment that is highly under-served and the agents that build expertise in this area will do very well over the next 5 years and beyond.

Foreclosure Defined

Foreclosure – A procedure by which the holder of a mortgage—an interest in land providing security for the performance of a duty or the payment of a debt—sells the property upon the failure of the debtor to pay the mortgage debt and, thereby, terminates his or her rights in the property.

In the United States, there are two sorts of foreclosure in most common law states. Using a “deed in lieu of foreclosure,” the bank claims the title
and possession of the property back in full satisfaction of a debt,
usually on contract. In the proceeding simply known as foreclosure (or,
perhaps, distinguished as “judicial foreclosure”), the property is
exposed to auction by the county sheriff
or some other officer of the court. Many states require this latter
sort of proceeding in some or all cases of foreclosure, in order to
protect any equity
the debtor may have in the property, in case the value of the debt
being foreclosed on is substantially less than the market value of the
immovable property (this also discourages strategic foreclosure). In
this foreclosure, the sheriff then issues a deed to the winning bidder
at auction. Banks and other institutional lenders typically bid in the
amount of the owed debt at the sale, and if no other buyers step
forward the lender receives title to the immovable property in return.

Statutory foreclosure is foreclosure by performance of a power of sale
clause in the mortgage without need for court action, since the
foreclosure must be done in accordance with the statutory provisions
governing such sales.

Strict foreclosure
refers to the procedure pursuant to which the court ascertains the
amount due under the mortgage; orders its payment within a certain
limited time; and prescribes that in default
of such payment a debtor will permanently lose his or her equity of
redemption, the right to recover the property upon payment of the debt,
interest, and costs. The title of the property is conveyed absolutely to the creditor, on default in payment, without any sale of the property.

Resources:

HUD – How to Avoid Foreclosure

Stop Foreclosure – Sell Your House

Wikipedia – Foreclosure

Real Estate Investing System

Do you have a system?

I met with a large investor the other day and he (like me) is very systems oriented. What I mean by this is that if you are running a business (i.e. real estate investing) you MUST come up with a documented, reproducible system for everything you do.

So many small business owners “wing it”. While this may work while you are a company of one or two, your growth will be limited because you will not be able to delegate critical tasks to employees.

In the context of residential real estate investing you’ll spend a lot of time analyzing deals, lining up contractors, deciding what repairs you want to do and figuring out how to sell.

Here are a few ideas for investors on things to systemize:

Do the same basic repairs to every property, using the same products (same carpet, same paint, same cabinets etc. in every rehab)

Setup rules around what offers you’ll make on properties. While most investors have a basic formula in their head, clearly define them and write them down.

Know your exit before you enter. You should have a very clear idea of what
your exit strategy for the property is before you buy.

Documents/contracts/forms. Most real estate investors are in the dark
ages when it comes to automating the many documents required in a real estate transaction. If you are entering any information more then once (sellers name, property address and legal description) you are doing it too much. Technology can be a great tool here.

The offer process. If you make an offer how soon do you follow up? How do you counter if they say no? If they decide they want to wait a few months how do you follow up?

An excellent resource for business owners that want to create systems are The E-Myth Revisited and (if you really want the details) E-Myth Mastery. I highly recommend both of these books!

Making Offers on Houses

You’ve done your marketing, you are getting calls, but somehow you are having a hard time closing the deal and buying a property. What’s the problem?

Many investors struggle with how to present offers to home owners, while it seems to come naturally to others. This entire process essentially boils down to selling. You are selling your services, reputation, integrity, and experience to the home owner. Your job is to convince them that your solution is better then their
alternatives.

Whenever you are selling something (coffee, cars, houses, etc.) one of the most important things to remember is – you are providing a solution. This is what sales is all about. Someone has a problem/need/desire and you are there with the answer.

The homeowner does NOT care about:

  • why you only buy houses for xx% of value
  • how much equity you need
  • how much cash you have in the bank
  • what you are going to do with the house after you buy it
  • how busy you are
  • what your schedule is
  • etc.

None of these things provide a solution to the home owner’s problem.

If the purpose of sales is to provide a solution, how can you structure your offers to provide a solution to the home owner’s problem?

Meet the Need
Understand what the desires of the home owner are before you make your offer. Did their mom just die in the house and they don’t want the hassle and memories of dealing with a drawn out sale? Did their company relocate them and provide for all their expenses, now their original house is just dead weight? Are they in the middle
of a divorce and need a quick sale to settle things?

The reasons why someone wants to sell their house are as many as the styles of homes out there. The key is to understand the why – so your solution can match their need.

Walk Away
There are A LOT of deals out there. Do not waste your time chasing property that
does not fit your buying criteria (you DO have a buying criteria don’t you?). We make an offer on every single house that we see. But we do not chase deals. You’ll end up buying property that is a poor investment, or miss the 3 great deals because you are so tied up in the bad one.

Real Estate Fraud / Scams

These articles remind me of three things.

1. Make sure you regularly consult your attorney to ensure you are following the law – things change often and you never know when you might inadvertently be doing something illegal. (see HB1823 post).

2. Always double check everything when buying property. There have been a number of times when we were ready to purchase a property and “dug a little deeper” to find inflated comps (prices listed in MLS were not the true selling price), phony appraisals, and inspections that didn’t hold up.  Remember – feel free to trust the seller, but always, always double check what they tell you!

3. DO NOT think that you can commit fraud and get away with it.  “The truth will always find you out”.  No one is above the law and the penalties can be stiff.  I’m sure Bernie Ebbers never thought he’d spend a day in jail.  Given the choice I’m sure he would take his lumps from the street rather then spend time behind bars.

Articles:
Former Chicago Title CEO Pleaded Guilty
NJ Man Charged With Conspiracy in $30M Real Estate Fraud Case
Phony Real Estate Investor Behind Bars
Decatur Man Jailed in Real Estate Fraud Case
Hearing Held in Real Estate Fraud Case

Do you have a plan?

Where there is no vision, the people perish” – Proverbs 29:18

Real estate investing, just like everything else in life requires a plan.  You can not float through it without a set path and expect to be successful.

This is more then just “I want to make a million dollars buying houses”.  This is a methodical step-by-step plan that starts with a vision (perhaps the statement above) and is boiled down to the detailed elements of your daily tasks.

Your plan should answer the WHAT, HOW, WHEN, and WHY of everything you do.

Investing is NOT complex.  Most people fail because they meander along aimlessly for a period of time with short bursts of activity.

If you have a well thought out plan, with clear defined goals, and you execute that plan in a consistent manner with perseverance I guarantee that you will be successful.  Use this simple formula and “all your your wildest dreams come true”.  (This is worth 100 times more then any money you’ll give to a late night “guru” – and it’s free!)

$250,000 Tax Free – Capital Gains Exclusion

How do you make $250,000 – $500,000 and never pay taxes?

The IRS has setup a great way for you to take up to $500,000 in TAX FREE gains on the sale of your personal residence.  If own a property, and live in it for at least 2 years you do not have to pay any taxes on the gain – up to $250,000 if you are single, or $500,000 if married and filing jointly.

You can do this with rental or investment property as well.  As long as you meet the requirements above this applies to any property you own.  You can not use this exclusion if the property is part of a 1031/Starker Exchange.

Helpful Links:

–> IRS Publication 523 – Selling Your Home
–> Motley Fool – Making Home Sale Capital Gains Disappear
–> Forbes.com – The Shelter Shelter
–> Bankrate – Capital Gains Tax Break a Boon for Owners