Posted by Phil (CO) on March 07, 2003 at 21:33:34:
Scott,
Thanks. Your examples seem realistic. I appreciate your insight.
Phil
Short Sale -Where’s the Money? - Posted by Phil (CO)
Posted by Phil (CO) on March 06, 2003 at 23:48:28:
O.K., I’ve read at least 100 posts on short sales in the archives, and from that I have a pretty good idea of what’s involved. Two things are clear:
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The seller has to be in pretty bad financial shape. Otherwise, the income tax consequences may be too much of a barrier to convince the seller to do a short sale. In my mind, this isn’t an issue because there are plenty of people in this situation.
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The bank has to be motivated. There are dozens of references to needing pictures of damages, and also to the fact that the bank will likely require an appraisal.
Implicit in the remarks about the banks is the fact that the banks only seem to be willing to participate in a short sale if the FMV of the property is less than the amount owed. One might assume that they are only willing to discount to the FMV value.
In that case, where’s the profit? FMV is FMV, regardless of what’s owed, or what the ARV is. The only way that I see to create profit for the investor is to somehow get the bank convinced that there is more damage than there actually is. But if they will get an appraisal, I don’t see how that can happen.
What about the seller of a “pretty house” who is facing foreclosure? If there is no room to negotiate on damages (because there are none) with the bank, how much will they discount on a short sale? I’m thinking $10k to $20k - the cost to foreclose.
So, my question is - Where’s the money?
Re: Short Sale -Where’s the Money? - Posted by mike
Posted by mike on March 07, 2003 at 07:57:27:
I am just starting to get interested in short sales and would like to ask a couple of questions re same.
I would guess that these deals could be done on vacant properties, right?
Another thought I had is that these are some of the types of properties that investors search out under the category of "looking for little or no equity properties? Possible?
And another thought is that there seems to be a method that a seller involved in a short sale could be relieved of mortgage over basis problems with IRS by ??? filing BR prior to or simultaneously with the close of the transaction and not reaffirming the loan payments to the bank… anyone know which and if this is correct?
AS far as “where’s the money” is it seems that if you would deduct all normal closing costs, a full 6% commission that the bank would probably pay if they took the property back, any fixing up that needs to be done, waiting for a new buyer to get a new loan (from the lenders’ perspective) Then you might get the property at 85% or less and if it is in a hot selling area you might go in at 85%. Bronchick says that you can make a fortune at buying properties at 90% if done
with forethought. Of course, if I were in a buyer’s market I would make really low ball offers… Just a couple of thoughts and questions I had.
Any help and other thoughts appreciated.
Thanks,
Mike
As a forethought I suppose that investors with cash or a line of credit would be looking for a much greater discount.
Re: Short Sale -Where’s the Money? - Posted by michaela-ATL
Posted by michaela-ATL on March 07, 2003 at 07:18:19:
Phil,
FMV is not a definite. Just because property B in the same neighborhood with the same BR/BA and sqf sold for a certain amount, that does not mean, that a buyer would pay the same for Property A. With that being said…er…written, here are a few other things for the bank to consider:
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Part of the ‘hardship letter’ to the bank is usually a statement, that the seller’s attorney is suggesting bankruptcy. This could hold the foreclosure up for months or a year. So ‘Cash in hand now’ may mean more, than more cash down the road (a bird in the hand means is better than 2 in the bush)
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What’s the market like? At Full market value the property is not likely to sell at auction, meaning the bank will get it back as an REO. Now they’re faced with having to sell it, maybe discounting it, paying commission and sitting on it.
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There may be other things, than repairs, that can be pointed out to the bank as being a ‘negative’. Presents of termites? boarded up house next door. New construction for the same price as appraisal of this house (a lot of buyers would chose the new house, so the value of this one would decline). You could take pictures of ‘prostitues and drug dealers’ on the street (do some of your friends like to play dress-up?
). Maybe the draw in this neighborhood is the school and it’s fall and families don’t move at this time of year. -
Mortgage companies are being punished for foreclosures. They lose 8 times the ability to do mortgages. So, if they foreclose on a 100k mortgage, they lose 800k in potential loans.
Those are just some of the things, that might influence a bank when presented with a short-sale.
michaela
Re: Short Sale -Where’s the Money? - Posted by Phil (CO)
Posted by Phil (CO) on March 07, 2003 at 12:27:19:
Mike,
Thanks for your answer, it really drove home one of my points.
To me, and apparently you also, it looks like the investor can expect a 10% to 20% discount from the bank. Which is plenty of room to work in most deals.
As I point out in my response to michaela, there are several posts and one “how-to” article that talk about $100k discounts. They make it sound (intentional or not) like that is all profit. In reality, the only reason that the bank(s) would go for such deals is because the property is really worth $100k less than what is owed, leaving not much for the investor.
I’m convinced that short sales are a great approach in the right situation, but I also now know that the profit potential isn’t much more than in a “normal” deal. Unless, of course, you get lucky.
Thanks again,
Phil
Re: Short Sale -Where’s the Money? - Posted by Phil (CO)
Posted by Phil (CO) on March 07, 2003 at 10:50:26:
Michaela,
Thanks for your response. I have a couple of comments.
First, I understand and agree with everything that you wrote.
I guess that one of the points that I was trying to bring out is that any valid argument that you would make to the bank to devalue the property (e.g. all of the things that you mention in your 2nd and 3rd paragraphs) will also present problems for you to sell the property when it comes time.
Where I was hoping to go with this thread was to better understand the profit potential of short sales. There are plenty of examples on this site, including one of the “how-to” articles, that talk about getting the bank to discount the loan by $100k or so. For us newbies, that looks like a HUGE carrot.
In reality, it now looks to me like it’s a huge onion. When you peel away all of the layers, you’re left with a much smaller profit. In that $100k are probably $50k in repairs, $18k in realtor fees, $10k in holding costs, and who knows what else.
So, it still appears to me that there is probably an extra $10k or $20k potential for the investor to grab because of the “pain-in-the-neck” factors that the bank has to deal with. Combine that with the fact that you now have a method to make a deal out of a situation that may first appear impossible, and the short sale method looks pretty good. I’ll make that $20k work every time.
I just wanted to better understand the liklihood of walking away with a huge payday. It appears that it’s no different than with any other deal - if you get lucky with the bank, you’ll get it. Just like in a normal deal - if you get lucky with the seller (or buyer), you can get a huge payday there, too.
Re: Short Sale -Where’s the Money? - Posted by michaela-ATL
Posted by michaela-ATL on March 07, 2003 at 15:38:34:
Phil,
I notice you using 10-20k and 10%-20% profit inter changably. There can be quite a difference. I wouldn’t touch a house with a ten foot pole, that I could buy at ‘only’ 80%. That’s just not enough profit.
I also don’t agree, that i have to deal with every problem in the same manner, that I’m presenting it to the bank: I cn hire people a lot cheaper, than what I’m presenting a repair estimate to the bank. Imagine getting 3 estimates: 1 from a handyman, 1 from an allround carpenter and 1 from a high level trim carpenter. There could be quite a spread. Needless to say, I will use the high one in my presentation to the bank.
Also, there can be easier fixes for those same problems: the prostitute and drug dealer might go back home after they got $ 20 each forthe photo oportunity, because that’s the only reason they’re there for ;-). The empty lot next door - you may already know the builder, that’s getting a permit.
The boarded up house - you’ve already turned another investor on to it. Use your creativity to turn things around.
The fact is: You will need to pick and choose the properties, that you want to work with. This business is not 100% safe. Things may and will go differently than what you designed it and you need to be willing to roll with the punches and improvise.
One person may complain about the sour taste of lemons, while another has a lemonade stand.
just my thoughts
michaela
Re: Short Sale -Where’s the Money? - Posted by Phil (CO)
Posted by Phil (CO) on March 07, 2003 at 16:27:04:
Thanks again. I agree with you 100%.
But to state my point in a different way, when people on this board request help in determining a price for the bank, invariably the short sale experts respond with a price that is unreasonable by anyone’s standard. I completely understand that’s a negotiating tactic, but for newbies reading this stuff, it makes it look like a legitimate get rich quick scheme.
I stand by my original conclusion until someone convinces me otherwise - the bank will only discount to what the bank thinks is FMV minus an allowance for relieving their problem.
I agree with you that the investor can likely squeeze some extra dollars from the difference between the bank’s idea of FMV, and the actual FMV that the investor can get.
I will say it again, I continue to believe that short sales are a great tool for the right situation.
But you should read the how-to article (if you haven’t already) entitled “No Equity = Big Bucks” and tell me if those examples aren’t too good to be true. In their fictitious example with a house worth $100k, which I assume accounts for repairs needed, they claim that the bank would agree to a $55k short sale price. I simply can’t believe that the bank would hand over $40k to the investor ($95k owed), it’s simply not good business. Now if I’m mistaken about what the $100k value means, in other words, if the $100k is really ARV, then the article is very misleading. It simply cannot be that easy.
I’ll say it one more time, short sales appear to be a great tool. I can’t wait for the opportunity to make one happen. But learning to do short sales is not like winning the lotto like some of the articles and posts may indicate.
Re: Short Sale -Where’s the Money? - Posted by Scott
Posted by Scott on March 07, 2003 at 21:25:15:
You can’t and won’t learn how to do short sales through this forum, but here’s the basics that can be done all day long.
First, the bank perceives the value of the house though the BPO (brokers price opinion) so most of the time the deal hinges on a lower than average BPO influenced by you. After that you can usually get the bank to take about 80-85% of that value. They take that because of the way there costs are attributed, as noted on a previous post. So here is a very conservative example of how a short sale would work on a house with zero repairs.
100 ARV
90 BPO
72 Accepted offer
92 Quick Sale
9 Transaction and closing costs
11 Profit
Now realize that their was little work on your part just a bunch of paper work and telephone calls. Also note that this example is conservative on the buying and selling side. Now think about a larger $350K House, lower BPO, inflated repair costs subtracted from the BPO, motivated bank takes 77% of adjusted BPO and full market value sales price.
350 ARV
300 BPO
25 Contractor Estimated Repairs
15 Actual Repairs your cost
275 Perceived Value by bank
212 Accepted Offer
227 Hard cost after repairs
43 Holding and sales costs
350 Sales price
80 Profit
One last note, 2nd mortgages are the best, negotiations typically should start at 10% of mortgage value.
Good Luck and learn all you can there plenty of ways to skin a cat.