Here in the Louisville, Kentucky real estate market, I’ve heard rumors that as many as 1 in 4 listings for sale is a short sale. A scary scenario in any market, but worsened by the fact that most REALTORS don’t know how to market, negotiate and get a short sale closed. Unfortunately, as I work with investors, I’m seeing bank owned properties that were listed for months before the foreclosure auction without selling.

As a REALTOR, we have always been taught to get the highest and best offer possible for our clients. This approach is absolutely the correct one with a regular home seller. In fact, our real estate laws and regulations, as well as the National Association of REALTORS Code of Ethics, require that we always work in the best interest of our client. Thus, in a normal situation, getting the best offer usually is in the best interest of the client.

However, when we have a client that is “upside down” or “under water” with their mortgage, and is, or is about to be behind in payments, then their best interest may be something else entirely. Think of your credit rating as a car wreck, a few dings are not nearly as problematic as having the car totaled. A short sale is like some dings, if it is done properly. The seller will have some late or missed payments in their credit report, but with the help of a real estate attorney who actually understand short sales, there won’t be a deficiency judgement and the loan will be noted as paid. The missed payments will affect the credit score to some extent for 1-2 years, but won’t usually be devestating. However, if the home proceeds into foreclosure, then the credit is effectively “totaled” and it will be at least 7 years before recovery.

What I’m finding is that many REALTORS listing properties that are pre-foreclosure, don’t understand that the key is to get an offer and let the bank decide whether or not to accept the short sale. All to often, the listing REALTOR is still trying to get the best price for their client, not realizing that you have to get an offer to attempt a short sale, and a short sale is ALWAYS better than a foreclosure for everyone involved. Some REALTORS even recommend a seller reject an offer and never even present it to the lender for approval. Let the lender determine what is reasonable to their bottom line, they can always reject it or counter back.

Many agents forget that the seller cannot get any funds at closing, so holding out for a higher offer rarely benefits them. The keys to a successful short sale are: persistence- it’s never easy locating the person with the authority to approve the short sale, patience- banks move at their own pace and it has nothing to do with any time frame written in a contract, preparation- make sure the sellers and the buyers understand this process is slower than normal, and pricing- if you never get an offer you can’t have a sale!

If you want to know MORE, you can go to the wholesaling post on my blog as well.

That works really well for getting the addresses, but many of the agents who list a lot of foreclosures don’t have time to work with buyers. Handling foreclosure properties for a bank requires a lot of paperwork and caretaking. They may have a few steady investors that they work with, but for the most part you’ll need to find a buyers agent.

Finding a buyers agent is a little harder. Many REALTORS say they work with investors, but don’t really understand the foreclosure market. Bank owned properties are a different breed, and buying a bank owned property is not for the faint hearted!

A good investor agent will not have time to show you the 25 properties you need to see to find the “diamond in the rough”. It will be up to you to drive by the addresses and decide if you want to go inside. Then call your REALTOR to meet you. Ask them if you buy lunch if they will discuss your goals and how best to meet them, and how you can most efficiently find the properties you are searching for. Ask them for advice on locations and strategies, as well. If they don’t “get” what you are trying to do, try again until you find the right agent to help you meet your goals. Then, treat them like the team member they are!

If you drag your REALTOR out to see 15 houses and never make an accepted offer, you will find that they no longer answer your calls. They have 10 other investors who do screen the houses and respect their time. A good investor agent is money in the bank for you, never take them for granted!

Banks do not follow the normal rules and practices of the local MLS board. They almost alway have an “addendum” which is essentially a re-written contract that puts them in control of the sale. They are sold “as is”, there are no disclosures, and there is no recourse after the sale. They set the good faith deposit, and after a certain number of days it becomes non refundable for any reason. They also set the closing date and place, and any delays will cost a “per diem” or daily surcharge. You must provide a proof of funds or financing letter with any offer to be considered. VA foreclosures here in Louisville, Kentucky actually add on a “service fee” (the last one I sold added $800 in costs to the buyer), and when we tried to contest the fee because it was not disclosed until after the withdrawal deadline, the seller was told he would forfeit the deposit if he didn’t close. The deposit was $1500. He closed the deal, but hasn’t bought another VA foreclosure.

It is up to the buyer to perform “due diligence”, and it is often best to do most of this prior to making an offer. Unfortunately, the seasoned investor will walk through a “hot” property and determine the condition quickly. They may even take their contractor through to give a rough estimate. This enables them to write an “as is” offer with a quick closing, and may shut the novice investor out of the best deals. This is why having a good investor agent is so helpful, they can steer you clear of some bad deals, check on sewer connections and flood plains, and help with neighborhood price ranges so you can make a quicker and more informed decision.

In this market their are plenty of deals to go around. You just need to have your financing ready, and be willing to move quickly. Getting caught up in the “Paralysis of Analysis” has lost many a deal!

Anytime a significant part of the market isn’t selling, prices have to come down. When prices come down the investors step in. My partner and I recently bought a 3 bedroom 1 1/2 bath 2 story home for $29,000, it needed about $8,000 in cosmetics and waterlines (no heat =broken pipes, vacant=copper pipes gone) and is worth about $70,000 in a normal market. This is not a normal market, so we have it for sale for $55,000. It will rent for about $700/month. If it doesn’t sell in 60 days, we’ll put a tenant in and wait a couple of years for the market to normalize and let the tenant pay off our mortgage.

This sounds easy, doesn’t it? It can be, but we already have a relationship with a local bank that will lend us 100% of the sales price for up to 3 years. We just have to come up with the repair money and get the work done. It’s also important to know your areas, it’s only a good deal if you can sell it, or put a tenant in. There are areas that are so rough that it’s almost impossible to get a tenant to live there. It’s not a deal if you can’t make any money! Be sure you do your homework, then jump in! It’s time to buy!

While there are several solutions, many more sellers are now looking at short sales. These are homeowners that have been struggling to make payments but just can’t keep it up. While it used to be that lenders would not consider a short sale until the owner was at least 90 days past due for payments, we are seeing some of the lenders are now approving short sales when the payment is current or only 30 days late. This situation requires a lot of paperwork and proof of hardship and is a time consuming process so many REALTORS shy away from them.

When you have a homeowner that has developed a hardship (loss of job, illness, divorce) that decreases the family income, they will often try to stay current and maintain good credit for as long as possible. When they realize they can’t keep up, they often try to sell their home only to find that the sales price won’t cover expenses. This means they’ll have to negotiate for a short sale or let it go to foreclosure.

Negotiating a short sale is tedious and time consuming. It usually requires a team approach involving the sellers, the lender, the REALTOR and a really knowledgeable real estate attorney. It is very difficult for sellers and REALTORS to find the appropriate department, much more so the actual person, with the authority to approve a short sale. I have found that the attorney gets a much quicker and better response from the lender.

This addendum put me in the precarious position of trying to best protect my clients, without causing them to not be able to buy the home they wanted.   We did this by writing up an addendum agreeing to their addendum after the inspection period, and agreeing to exchange the original good faith check for certified funds once the inspection contingency was released.   The asset management company never signed our addendum, but they did wait for the inspections to be done before demanding the certified funds.

Because this particular home had some pretty obvious defects, we negotiated a lower price up front to cover the expected repairs.  Where we got into a bind, was that we discovered the house had a very high radon level and no sump pump.  Radon abatement was going to be costly, so we asked the asset manager for a credit at closing.  About 50% of the time they will agree to this if it is reasonable.  This particular company would not agree, so my buyer clients had to make a decision to continue with the purchase or release.  Fortunately, they felt like it was still a good buy for them and they moved on to closing.

What we are seeing here, in

Unfortunately, just because you have an “acceptance”, doesn’t mean you have a real contract, because all of the REO companies stipulate that acceptance is contingent upon the signing of additional addendums.  These addendums vary greatly by company and oftentimes negate major portions of the original offer. 

It is really important for buyers to understand that with a bank owned property, the original offer to purchase agreement is only the starting point, and the owner or management company is essentially calling the shots on the transaction.  For REALTORS working with clients, it is imperative to understand and convey to the client, that almost all the banks have certain guidelines and procedures that may not be in the best interest of the buyer.   Sometimes the listing agent will be able to provide the addendums prior to writing the offer.  In other cases, the listing agent doesn’t know to which company the contract will be assigned so they will not get the addendums until after the contract is written. 

Most companies require the good faith deposit to be non refundable after the inspection period, and I even had one company send notice of required fees for the buyer well after the inspection period.  The buyer was justifiably angry, since he was told he could pay the $650 fee to the asset management company or release the contract and lose his $1000 good faith deposit.

 REOs are usually listed “as is” and it is unheard of for a management company to agree to repairs, so offers need to really reflect the condition of the property.  That being said, I have sometimes seen them agree to a credit for the repairs at closing.  This gets really tricky if the lender requires repairs prior to closing, and the bank owner will not allow any repairs until after closing.  Asset management groups never agree to escrow for items after the closing.

Buying REOs is complicated, and not for everyone.  I’m really trying to educate first time and low down payment home buyers about these properties.  Unless they are in stellar shape, the loans usually won’t go through based on repairs.  I hate to have a buyer client spend money on inspections then have to release the contract over the repair request.   

Sometimes savvy sellers will give buyers a net sheet showing income and expenses for a property.  It is imperative to go over it item by item.  If they have owned the property for a long time, they may have a low mortgage balance, or a lower rate than you will have.  Mortgage interest is usually your biggest cost, so make sure you know your loan options before you commit to a property.  Also, be aware that any building more that 4 units automatically becomes a commercial loan.  Commercial loans generally have much higher closing costs and rarely have long term fixed rates.  They often have pre payment penalties as well, so do your research early in your due diligence period.

Taxes are another item to take into account, most tax assessors will make the new sales price the new assessment, so be sure to calculate your tax expense based on the sales price, not the previous assessment.  This also applies to insurance, the previous owner may not have felt compelled to fully insure the property, so get that quote early on as well.

Maintenance costs need to be evaluated carefully.  Make every effort to actually look at the appropriate page of the current owner’s tax return to see true expenses.  Once you see the expenses, you still need to evaluate based on age of the property.  Has there been adequate maintenance done, or has it been “deferred” waiting for a new buyer.  If all the furnaces are 20 years old, you better be budgeting to replace furnaces fairly soon.  And be sure to get CO detectors in if they are gas!  Same thing with the roof, if it’s 15 years old then budget for a new roof in the next 3- 5 years.  Look at everything involved with the property, from the driveway and exterior, to the interior paint and appliances, all the way up to the roof.  Set up a 5 year plan for maintenance, then budget accordingly.

Utility costs are important even when the units have separate meters.  Here, many of the apartments have separate electric meters for personal electric, but the owner pays for water and gas heat, plus trash and common electric for the hall and porch lights.  Also, when a unit is vacant, the owner may have those costs as well.  Call all of the utilities and arrange for transfer prior to closing, make sure that there are no costs to transfer.  Our electric company now requires a certificate from a licensed electrician if the power has been off for a certain length of time.  These certificates can run from $125- 400 so, again, make sure you are aware of all the associated costs.

If you decide to hire a property manager, make sure you have a detailed agreement spelling out the fees.  These can vary widely from one company to the next.  Pay attention to all the fees, some companies seem very competitive on the percentage of rent, then add on other charges such as, putting out a sign, surcharges for arranging maintenance, tenant screening.  Others may seem higher for percentage of rent, but don’t charge for every other little item.

Finally, do some serious research on the rents.  Properties can be seriously over or under rented.  It is important to know waht the current market rents are, if you are too high your tenants will move. In fact,  they may not even wait for the renewal period, or give you notice!  If you are too low, then look at small increments for raising the rents of current tenants- don’t “shock” them into moving.  Bring new tenants in a fair market rent, but let your long term tenants think they are valued.  A vacant unit almost always costs more than delaying a rent increase. 

First mistake- not having a plan.  I’ve seen many gung ho investors decide to jump into buying investment properties with no plan for what to do with it once you own it.  It may be a really great deal, but if you don’t have a plan for it, it is not the right deal for you.  Don’t work backwards, first devise your strategy, then find the deals that fit your plan. 

Second mistake-lack of knowlege.  Once you have a plan, you must either learn your market, or hire a professional to help.  The best investors know their market area so well that they can jump on the best deals on a moment’s notice.  A true investor knows all their money is made up front, buying at the right price is the key.  If you buy a property at tremendous discount, it will fit into any plan.

Third mistake-not having your finances lined up.  Unless you are fortunate enough to have a wealth of cash, you need to have some resources available to fall back on.  These can be a line of credit or a private lender.  But it must be cash that is available immediately.  You never want to lose a really profitable deal because you couldn’t get the cash today.