We live in a foreclosure bubble right now. Suddenly everyone is an REO (Real Estate Owned) or Short Sale expert. The sad reality is that many individuals such as real estate agents, as well as some attorneys and CPA’s, do not really understand the in’s and out’s of Short Sales & Foreclosures to the point of giving out information that is not only incorrect but dangerous. I have included some bullet points that can shed some light on differences between Short Sales & Foreclosures…

1.] Current Employment

Foreclosure; employers can and do check credit…may create challenges.
Short Sale; not reported on credit report…would not create an employment challenge (However, late payments are reported & may provide challenges).

2.] Future Employment…
Foreclosure; creates challenges as it is highly detrimental. Employers often require a credit check on job applications.
Short Sale; not reported on a credit check and is not a challenge.

3.] Security Clearance…
Foreclosure; Those working in sensitive areas such as police, military, CIA, or any job that requires a high security clearance will almost certainly be transferred or terminated out of that position.
Short Sale; typically, does not create a security clearance issue.

4.] Deficiency Judgment…
Foreclosure; no negotiating with the lender…lender has the right to pursue a deficiency judgment in Nevada.
Short Sale; it may be possible to convince the lender to give up its right to pursue a deficiency judgment against the borrower.

5.] Deficiency Amounts…
Foreclosure; house sits vacant, goes through BPO and auction process…in a declining market values may decrease which can create a higher deficiency.
Short Sale; Typically, the homeowner stays in the home, so property remains in better condition. House is often sold sooner at a higher market value, resulting in a lower deficiency.

6.] Fannie Mae Loans (effective 5/21/2008)…
Foreclosure; homeowners who lose their home to Foreclosure are ineligible for a Fannie Mae loan for 5 years.
Short Sale; homeowners who negotiate and close a Short Sale will be eligible for a Fannie Mae loan in 2 years.

7.] Investor Loans…
Foreclosure; investors who lose a property to Foreclosure are ineligible for a Fannie Mae loan for 7 years
Short Sale; investors who negotiate and close a Short Sale will be eligible for a Fannie Mae loan in 2 years.

8.] Mortgage Loans…
Foreclosure; borrowers who lost a property to Foreclosure will have to disclose this on a 1003 loan application. This could and will affect the interest rate.
Short Sale; no similar question or declaration on the 1003 applications in regards to a Short Sale.

9.] FICO Score…
Foreclosure; FICO scores will drop anywhere from 200-300 points. A Foreclosure will remain on the credit report and as a matter of public record for 10 years.
Short Sale; not reported on the credit history. They are typically reported as “paid in full, settled”…still a derogatory, but not as damaging.

Short Selling Your Home; What is Needed…What is Required?…

Engaging Your Real Estate Professional…

1.] Are they “Short Sale Certified”?
2.] Do they have a Real Estate Team?
3.] Short Sale Package.
A.] Financial statement showing income & expenses.
B.] Last 2 years tax returns.
C.] Last 2 months bank statements.
D.] Last 2 pay stubbs.
E.] Hardship letter.
F.] Letter of Authorization giving the RE agent authority to speak to lender.
G.] Very important to have every page copied and prepared.

Department of Treasury; Guideline Changes as of 11/30/2009 that will apply to the Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives (HAFA) which is part of HAMP.

1.] Streamline the approach by utilizing uniform guidelines

2.] Provide a venue where;
A.] Loan modification is attempted first under timed constraints.
B.] If borrower does not qualify for a loan modification or fails the trial period, the property will be recommended for Short Sale.
C.] Loans that will qualify under this program;
*] Property is borrower’s principal residence.
*] Mortgage is first lien mortgage originated on or before 1/1/2009.
*] Mortgage is delinquent or default is foreseeable.
*] Current unpaid balance is <$729,750.00 on a single family residence (SFR).
*] Borrower’s total monthly mortgage payment exceeds 31% of borrower’s gross monthly income.

3.]If the lender accepts the Short Sale, according to the guidelines…there will be no recourse.

Important Website for More Information:
www.IRS.gov and click on the Mortgage Debt Relief Act of 2007.
www.HUD.gov and click on Avoiding Foreclosure page.
www.MakingHomeAffordable.gov for more information on President Obama’s plan
www.Freddiemac.com/avoidforeclosure

**Importance of good Legal & Tax Advice**  This element I cannot stress enough…totally empowering.  Prior to going forward with a  Short Sale or allowing you real estate to be Foreclosed upon, this is one of the smartest and most empowering things you can do to insulate yourself from further disaster.  Know your rights!

* Nouriel Roubini: “A sustained rebound in housing demand is vital for bringing down elevated levels of housing inventories and stabilizing prices. With housing affordability at an all-time high, buyers are responding positively to falling prices, historically low rates on mortgages and a US$8,000 tax credit for first-time home buyers.  Still, home sales and purchase mortgage applications remain depressed y/y. While the tax credit, which expires on December 1, 2009 will boost sales through the end of the year, a sustained uptick in demand for housing may be delayed as the worsening unemployment rate prolongs consumer retrenchment.”

* Lawrence Yun, Chief Economist, National Association of Realtors: “The housing market has decisively turned for the better. A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales.” (August 21, 2009)

* Calculated Risk Blog: The first-time home buyer tax credit will boost home sales through November 2009. “This level of first-time buyers is completely unsustainable–even if another tax credit is enacted. There was significant pent-up demand from potential first-time buyers who were priced out of the market in 2004-2006, and then were afraid to buy as prices fell. But demand from these buyers will wane.” (August 14, 2009)

The expert opinions vary, but somewhere a reality check must appear.  I am bullish on the long-term economic future for Las Vegas.  That being said, we are far from being “out of the woods” so to speak.

We have seen a significant rise in real estate sales in 2009 causing many realtors to proclaim that we have hit the bottom and are on the way up.  It is always interesting to me how they make these broad statements based on a few months of increased sales.  To me, this is the “living paycheck to paycheck” philosophy.  This uptake in the housing market has been driven by Foreclosures and Short Sales…hardly a positive sign when people are losing their homes.

The wealthy are having a difficult time selling their homes.  In March alone there were over 1100 homes for sale over $1,000,000.00 and less than 10 sold during that month.  Wealthy individuals drive economies as they have money to spend and create jobs by owning businesses.  Currently unemployment in Las Vegas is north of 13%.  Many believe it could go as high as 17%.  Until the unemployment numbers start to fall, we are still in a precarious position.  A big boost will be if the federal government extends the first time buyers tax credit of $8000, that is due to expire the first of December 2009.

As people in the market place, we have to “re-invent” ourselves.  Real estate agents need a reality check and get outside the bubble.  One agent, who I had highly respected up to that point, told me that our economy was on the way up because housing sales were up.  I pointed out to this agent that was only the case in homes below $200k, an distinct indication that they were REO and Short Sales.  this is the “paycheck to paycheck” mentality.  This is not something that is sustainable.  Unemployment must stabilize and begin to decrease for prices to climb.  The mid-level and high-end markets must show signs of recovery.  This could easily take 2-3 years as there are more ARM re-sets to happen in 2010 and 2012.  We must be creative in our approach.  Look for other ways to stimulate the markets.

One positive note is that the buildable lots in the Las Vegas area are being scooped up rapidly by investors and builders.  Prices in that market are rising.  Raw land prices seem to have stabilized as well.

Ask yourself this…Are you ready to re-invent yourself in the housing market?  Are you ready to take that Empowering step?

In my last post we discussed how the single biggest advantage associated with REO’s is the fact that equity can be created instantly either by finding a hot deal or through shrewd negotiation. There is no one telling the bank that they owe too much on a property and can’t lower the price.

We discussed two types of scenarios that give leverage and Empower the investor, while allowing him or her to avoid the issue of “Non-Assign-ability“. These were “Add to the Contract then Quit Claim” and the “Simultaneous Double Close”. We looked at the Pros and Cons of each…

Today we will review two other scenarios that can Empower investors to avoid the pitfalls of “Non-Assign-ability”.

1.] The “True Double Close”

This is also known as the “wet close”. It is the same as the simultaneous double close…the wholesale investor is buying the foreclosure property and instantly reselling it to the end buyer for a profit, except that the wholesale investor is coming in with his or her own cash to fund his or her end of the deal.

This makes title companies happy, but it may be difficult for the beginning investor who may not have a lot of cash sitting around to work with. There are companies that provide funding for these types of transactions. They are called “flash funding”. They do same day transactions for a fee. Title companies like “wet closings”, but if “flash funding” is utilized, it eats away at your profits.

2.] “Sell The LLC”

This method is becoming more popular, especially when the end buyer brings cash to the table. The wholesale investor brings an offer on a property under an LLC entity. Once the bank accepts the offer, the investor quickly registers the LLC with the state.

At that point, the investor finds an end buyer for the property. They agree on the price and agree on the terms by purchasing the entire LLC for the price of the wholesale fee. From there, as the new owner of the LLC, the end buyer is Empowered to close on the original transaction and purchase the property.

The upside to this method is that you work around the extra costs in the form of the transfer taxes and/or flash funding fees that come with the “double-close” methods. Another benefit is your name never goes on the transaction.

The downside to this type of transaction is that the end buyer has to pretty much be paying cash. Banks typically do not lend money to LLC’s. You wold have to purchase the property in your personal name to be eligible for a mortgage. Another thing to consider is that if you start buying and selling numerous LLC’s in a month, you might catch the attention of state regulators, who would be confused as to why you are buying and selling so many LLC’s in a month.

Using good business sense, being creative with the way you as an investor structure the deal…you can navigate around and make a profit on foreclosures by “flipping” them. These methods make it easier for the investor to bring little to none of their own money to a transaction, enabling them to realize less risk, leverage themselves further if they so desire, and maintain a level of privacy. Armed with these “work arounds”, investors nationwide are able to successfully wholesale flip REO foreclosures.