15Sep10 The Key to Successful Short Sales Transactions – Understanding Motivations

We have spent a lot of time talking with our users over the past year about what works (and perhaps more importantly, what doesn’t work!) when managing your short sale pipeline. One of the key differences between successful investors and agents and ones that struggle (and a key factor in improving your successful closing rates) is quite simply putting yourself in all involved parties shoes and finding common ground. You need to think about the motivations of the bank or lender, the homeowner, the real estate agent, the buyer(s), and any 2nd lienholders that drive the decision making process. Understanding how these motivations conflict with each other will help you find common ground to get deals closed.

Let’s run through them one by one!

The Bank or Lender (Primary Lienholder)

This is it – the big kahuna. The bank has the keys to the castle, so don’t underestimate their motivations when it comes to a short sale transaction. The bank’s short sale decision making process is driven by a single factor – money. Remember – the bank’s ideal situation is that you continue to make your payments on the agreed-upon schedule. This ensures that they make the interest on the loan and get the balance paid in full.

Let’s circle back to motivation. What motivates the bank to accept a short sale offer? If you guessed $$ Money $$, you are right! It’s a bit of an inverse situation though – banks get into loans expecting to be repaid the principal balance plus interest. In this case, you are asking them to take less money – and the only way that is going to work is by demonstrating that the alternative is even MORE less money. In other words, the burden of proof is on you to motivate the bank to accept your offer by proving to them that their financial position will be worse if they do not accept the short sale. This is typically done by carefully explaining to the bank what the outcome will look like if they go all the way to foreclosure, and then additionally proving that foreclosure is imminent.

So, let’s recap on how to motivate the bank -

  1. Prove that foreclosure is a more financially damaging than a short sale and back it up with evidence! (See screenshot below)
  1. Prove that foreclosure is imminent and cannot be prevented and back it up with evidence! ( A good short sale hardship letter helps)

The Homeowner

The homeowner is in a different situation. They are falling behind on their payments, are hopelessly underwater, and it appears to them there is no way out!

Similar to how the bank is mitigating their losses in a short sale, the homeowner also wants to mitigate the damage to themselves and their families. The motivating factor for a homeowner to pursue a short sale is getting themselves out of a bad situation that is going to get worse. The interesting thing about a short sale from a homeowner’s perspective is that, unlike a typical home sale transaction, the homeowner / seller really does not care any more about the sale price of the house. This is because they are already underwater – and to them, getting out of $50,000 or $75,000 really isn’t significant – it is the getting out that is significant.

The only time that changes is when the lender is looking for the homeowner to assume a deficiency judgment. In that case, the homeowner will still be motivated to minimize the loss, since they will be responsible for it after the sale completes.

Use the homeowner’s motivation to get out of their situation to get them to play their part in the transaction – including providing necessary supporting documents about their financial situation and a good, strong hardship letter. It is best if you can negotiate away any deficiency judgment (HAFA properties will automatically have no deficiency) to keep the motivation of the homeowner strictly on leaving the property – but recognizes this directly conflicts with the bank’s motivation – money. Our recommendation in this scenario is to try to work for the homeowner’s benefit – carrying a deficiency without having any asset to back it up is not a fun situation to be in.

The Realtor

Like any real estate transaction, realtors want to close the deal and make commissions (under the guidelines of NAR or other realtor ethics codes). It’s their job, after all!

A motivating factor for agents is most certainly the time involved in a transaction. Time is money, and many real estate agents despise working with short sales because (yes, it is true) they take more effort than a standard transaction. Being in the middle of a real estate transaction is enough work, now you have to throw in the multi-month bank approval process and due diligence phase and deal with additional red tape, for the same commission.

Motivating realtors, then, can be done by improving their processes or saving them time. If you are the real estate agent, then your motivation should also be to save more time. If a particular home nets you a commission check of $2000, and it took you 30 hours to make it happen, vs. 60 hours for a similar check on a short sale, you worked for half the rate on the short sale! ($66 an hour vs. $33 an hour, respectively).

How do we improve time? By building efficiencies and work flows into the process, especially for repetitive tasks. Short sale software like Short Sale Artisan is certainly one way to improve efficiencies. So is a simple spreadsheet. Another one is simply making win-win situations right off the bat by reading blogs like this and understanding how to meet the motivations of the parties involved in a transaction to improve both rate of a successful close as well as reduce the effort needed for each transaction.

Another motivating factor for agents is simply business. They just want business – quantity is important! Even if agents do not like short sales, the bottom line is being a successful agent in today’s market depends on understanding and working the short sale process successfully. If you want to have a good pipeline of work going, then you need to include short sales in your portfolio.

The Buyer

The buyer’s motivation is the same in a short sale transaction as a normal transaction – it is all about getting the best price! Whether the buyer is an investor looking to eventually flip the property or a family looking for a place to live, the price is what matters. Many buyers are attracted to short sales and are motivated to work through one despite the onerous timelines and red tape simply because they often represent a good deal.

We again have a conflict here – the conflict that in a normal transaction exists between the Buyer and the Seller, in a short sale transaction is between the Buyer and the Lender. In a short sale, the buyer still wants the lowest price possible, but this time the lender, not the seller, wants the highest price.

Like any other real estate transaction, keeping a buyer motivated depends on their needs. For a family, it might be demonstrating a property to be a good family home, in a good neighborhood, or demonstrating a great value. For an investor, it might be demonstrating the ability to improve the value of the property and resell it at a future point in time, or keep it and rent it out. In any case, there is really nothing unique with the motivations of an end buyer in a short sale transaction to differentiate from your typical transaction.

The 2nd Lienholder or Subordinate Lender

The second lienholder, if there is one, has the exact same motivation as the first lender – money. So the same rules apply. The only additional wrinkle with the 2nd lender is that their “loss” in a short sale is typically much more than the first lenders. For example, a second lienholder may have a principal balance of $25,000 and only expect to recieve $1000 at closing – a measly 4% of the principal balance in such an example.

This is why the case needs to be ironclad that foreclosure is imminent (in which case, the 2nd lienholder would get nothing). The bottom line though: if there is any doubt as to the validity of the hardship, a $1000 check may not be enough to keep the lender motivated to accept the terms of the short sale arrangement. So it is doubly important to make your case well to these parties!

Keep the motivations of everyone in mind

The bottom line: when handling a transaction, you are effectively juggling the motivations of all parties involved in the short sale transaction. Keep that in mind when you are dealing with individuals, and you will close more deals and be able to find common ground when disputes occur quicker. Flexibility and some political posturing apply!

What are your thoughts on motivations and how to use them to inspire success? Post in the comments!

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7Sep10 Don’t Believe Everything You Read About Short Sale Flopping

A new article from the LA Times appeared on September 5th coining a new type of scam called, “Flopping”.

In a nutshell, the article claims that agents, lawyers, and loan brokers all conspire together to devalue a house more than it really is to get a better deal on a property than it is truly worth, and it coins this, “Flopping”:

In an illegal flip, the scam artists inflate the value of the property so the mortgage company will lend more than it’s worth. Then they work a deal with the seller to pocket the difference.

A flop works the other way. Rather than inflate the value of the house, they deflate it so the lender will permit the borrower to sell the place for far less than what it’s worth. Then the buyer or realty broker, who is often part of the fraud, sells it to someone else at its true value and splits the profit with others in on the deal.

First off, we have a big concern that the LA Times makes a statement like this with little backup other than a single quote about homeowner scams from the recently released CoreLogic study.Furthermore, the CoreLogic study commentary around fraud typically deals with transactions that are not arms length and / or transactions where full disclosure is not occurring (identifying future sales or B-C flip type of transactions).

We are surprised at the traction this article has gathered on Twitter and elsewhere; because frankly it just seems so cobbled together and leaving loose ends out there. The advice at the end of the article is almost incoherent:

• Be alert to who is counseling you. Don’t respond to unsolicited e-mails, and don’t call the numbers on roadside signs. Trust only your closest advisors. Or contact a counseling agency approved by the Department of Housing and Urban Development. If a counselor is not HUD-sanctioned, look elsewhere.

• Just because you see the letters LLC after the name of a firm or individual doesn’t make it or him legit. Check them out with the state authorities to make sure that they are registered or licensed, and with your state consumer-affairs agency to see if any complaints have been lodged against them. Ditto for your real estate agent.

• Beware of claims such as “We win 99% of our cases” or “We don’t take no for an answer.” It just doesn’t happen.

• If someone suggests that the lender will agree to an offer that is far below what your house is really worth, even in the current poor market, you should be wary. The agent, in conjunction with someone else in the transaction, may have a buyer waiting in the wings at a higher price.

First off, who is this directed towards? Homeowners? If so, then why does the opening statement say that Homeowners tend to lose millions on short sale fraud, when the homeowners financial position isn’t impacted once you are in the short sale territory?

Or, is this directed towards those working with lawyers and title brokers?

The final point they make is based on the house being worth far below what it truly is – who determines that? There is only one person that determines home values – and that is a BUYER. The bank does their due diligence with an appraisal or BPO before a short sale offer is approved. A ridiculous offer should be vetted during that procedure, but again – it’s important to remember that all these numbers are only someones opinion.

As we always say – as an investor or agent, you need to disclose what the circumstances around a transaction are and be honest about the deal. If there is a mass conspiracy between BPO agents, title companies, and brokers, I would sure be surprised. It does happen, but those are clearly unethical transactions. The bank needs to cover themselves and make sure they are performing accurate valuations to mitigate their risk, and that’s the end of it.

Thoughts? Have you encountered any of these so-called “Floppers” in your neck of the woods?

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25Aug10 How To Avoid Getting Scammed by Real Estate and Short Sale Gurus

There has been a lot of talk on the Internet the past few days about so-called Short Sale Guru’s and some of the scams they may or may not perpetuate. We have strong feelings about scammers at Short Sale Artisan, and that is: Steer Clear at All Costs!

Like any industry, there are always a few bad apples that can perpetuate the image that the entire industry is corrupt or full of selfish, greedy individuals looking to take advantage of other people. Real estate in particular has always been a trap for that. It’s hard to visit real estate sites anywhere on the Web without seeing promises of “Getting Rich in 30 Days” or “Make $10,000 In 5 Days without Having to Do Anything!”.

Let’s be clear – there is a lot of money to be made in real estate, and real estate can be an incredibly lucrative industry. But don’t think for a second that it’s easy or painless. Being successful in real estate, like any other industry, requires work, perseverance, and constant self improvement.

The old adage rings true: If it sounds too good to be true, it probably is.

Psychology behind being “suckered”

In a lot of ways, people get suckered for these get rich quick schemes the same way they do with diet pills. Many individuals, particularly those who are in a difficult position in life, will spend their last few dollars trying to buy some course or program that they think will just pile in money for them. It just doesn’t work like that, just like a pill won’t melt away the Bacon Double Cheeseburger you ate last night.

Even MSN posted a great article on so-called real estate riches, doing some hefty analysis into the real estate investment psychology.

“It’s the jackpot mentality,” says psychologist Patricia Farrell, author of “How to Be Your Own Therapist.” Just like the schmoe who buys a winning lottery ticket — every once in a while, someone, somewhere really does use these edgy real estate investment techniques to make millions.

“It’s not the principles that are flawed,” says Bour. “It’s the simplicity and ease that are overstated.”

Most of the information that is taught by the so-called gurus is available free on Internet forums like Bigger Pockets or REI Club and can be gained for free, by talking with other investors in user forums who have or are in the process of actually doing the type of real estate investment you’d like to do (be it short sales, commercial properties, investment properties, rental houses, or fix & flip). It requires you to search out information and be proactive about it -but if you aren’t willing to at least put in that level of effort, don’t expect to gain anything more just because you shelled out $2500 on a spiffy real estate course.

Evaluating a real estate investment product

That’s not to say all products are bad. You just need to be very careful with how you invest your money. Many courses are education, and education is invaluable. Next to a $100,000 college degree, a $2500 course can sure seem quite reasonable. But, like the college degree, its what you do with that information that determines if your up front investment was worth while.

Research the company and the owners of the company

This is such an obvious step, but spend the time to research what you are investing into. Find out how long the company has been in business, and where they operate out of. Find out who the owners of the company are, and if they have true experience in the industry. The great thing about the Internet nowadays is that it’s quite easy to find out if people are scamming, because people are very quick to post about bad experiences they have, and it’s hard to hide from bad press.

There are also many websites dedicated to reviewing real estate guru’s and their courses. They are worth checking out as well. Here are two to get you started:

Reed’s Guru Rating

Real Estate Course Reviews

Also, you should look also on Facebook and Twitter and see what people are talking about.Remember that these mediums are easily manipulated and affiliates and company shills can easily post “pretending” to be customers of the company. It happens all the time.

Make sure as well that the owners of the company / the Guru – has experience in what they are doing. They should be able to back this up with documentation and proof, and not self-created proof, like we have recently seen with this Karen Hanover scam that is percolating around the Internet. (Can you believe it? Some gurus will go so far as to self-invent designations for themselves that don’t really exist!)

Talk to people who have been through the course

Under no circumstance should you ever sign up for a class or course without talking to someone who has already been through it. Learn from others. You can get a feel then also for the content of the class and the value it provided.

Use common sense

Our rule of thumb: anyone who promises something crazy, is probably crazy. Also – don’t be a marketing puppet. You know marketing when you see it. Don’t fall for it! Use common sense, and look at the features of a package – not just the marketing hype.

Over the past few months,  we have found it amazing that some people can fall for such obvious marketing ploys. YouTube videos, extensive affiliate networks, and more; just go to reinforce the marketing perspective.

At Short Sale Artisan, we take great care not to patronize our clients. We believe every client of ours is a self-driven individual who is looking for tools to make their lives easier. That’s what we promise to deliver. We don’t promise free money, or easy-street, or that you won’t have to work again for the rest of your life in 84 minutes. Anything that promises to do the work for you and give you a 100% chance of success is a red flag, period.

Finally, don’t fall for time-pressure tactics. You will always here that you need to sign up today. You don’t. Your decision to take a course should be based on your desire to take one. Not a pitchperson planting that in your brain. A successful, well designed real estate course will be around tomorrow, next week, and next month. This is especially true on webinars where you will be pressured with “limited time bonuses” and other goodies.

What is the return and guarantee policy

You’d better be sure that if you aren’t satisfied with the course, you have a way to get your money back! Make sure you research this ahead of time!

Price to Benefit Ratio

It’s easy for Gurus to convince you that their courses or software products are worth the steep up front fees, because they can make the easy claim that “All you need to complete is one deal and you will make back many times your investment”. That’s true, but if they are so confident in the ability to deliver that one deal – they should let you pay after you’ve made your first deal.

Our opinion: look at what you are getting. It makes no sense to pay $2500 for a “setup fee” for a piece of software, in our opinion. What software out there costs that much money, unless it is an enterprise level piece of software for a company with dozens or hundreds of employees? We feel that these exorbitant setup fees (charged by companies like Freedom$oft) is almost extortion. These companies aren’t making their money by providing a good product at a fair price. They are making their money by suckering a few people into signing up for empty promises. In our opinion, this is not only scammy, it’s also highly unethical. These types of deals lead people to feel like they have “sunk cost”, that is; they have invested in the system and do not want to cancel, even though they get no benefit from it.

Industry damage

Another unfortunate byproducts of scammers is that they make the industry look bad and shady, when it truly is not.

We’ve all read about the Freddie Mac report on investor fraud. These types of things are strongly perpetuated by the “bad apples” in the investment training and education categories. Overall, views of investors range from “meh” to “unethical”, even though the majority of investors are stand-up people making a living with a true career path, like any other entrepreneur. That’s why it is so important we self regulate and weed out these guru scams and investors who behave inappropriately.

Some scams, exposed!

Just in the past two weeks, a big one has been the Karen Hanover commercial real estate investing.

This one involved creating fake designations and placing falsehoods on an resume.

The “associations”  Karen Hanover  touts as being a member of CCREA NAIA (and the self storage one SSEI?) are all her own creation.  In February she had the balls to create a press release to tout how the CCREA had awarded her real estate course its #1 ranking! I love tenacity and perseverance, but fraud is disgusting and seeing how there are so many dubious characters in this business, it just bugs me.

Anyway I sent an email to Sperry Van Ness’s Human Resources department and got back the enclosed email. According to SVN she has never worked there and their attorneys are looking into it. ))) I have not called Marcus & Millichap.

This is pretty scary stuff. It’s so easy on the Internet to look professional and real, and that is why so many people fall for scammers. It’s not enough to be presented designations – you need to follow up with them!

Now, that’s not to say that Karen Hanover doesn’t have valuable information to help you out in your real estate investing career – we are only suggesting that you need to tread lightly when contemplating courses such as hers. It certainly doesn’t leave a great first impression when you hear about how things like her designations are fabricated.

So what should I do?

We are not against real estate courses or investments at all. We just think everyone needs to step back, take a breath, and not be blinded by the promises that are made by the marketing wizards that run these companies. Evaluate the course for what it really is.

We personally feel that the best courses are ones that aren’t “in your face” marketing, but are more subtle and have some more composure. These courses stand on their own, and don’t need ridiculous promises to drive hype up to people who are vulnerable to the small glimmer of financial freedom with zero effort.

You don’t see real education institutions (like colleges) pulling these types of marketing tactics, so you should be turned off when you see high pressure sales tactics.

We’d love to hear your stories in the comments about companies that scammed you! Exposing them, as we mentioned above, is one of the most important things we can do to clean up the industry. There is a lot of real, legit money to be made investing in real estate, especially short sales with the market today. Remember, even a good course does you no good if you just attend and don’t do anything afterwards. Action is necessary!

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24Aug10 NAR Graphs Show Housing Market Woes Far from Over

Came across these very interesting graphs from the excellent Calculated Risk Blog today:

This first graph shows Existing Home Sales from 1994 and forecasted out to Jan 2011. It’s interesting how this corresponds with our other blog post from this morning discussing the woes of the housing market. The artificial boost the homeowner tax credit gave first time homebuyers was quite significant, judging by that great drop in prices.

This graph above makes it look like inventory sure is going nowhere quickly. Despite historically low interest rates and many deals around on houses, people just simply are not buying properties. This means that we can expect some significant foreclosure activity and short sale activity for the next period of time (in our opinion: several more years). This underscores the importance to everyone involved in real estate the emergence of the short sale transaction from a niche category to a truly mainstream way of clearing out bad inventory on the bank’s books. It’s a tough nut to chew, but one banks are really going to have little other options.

Another interesting trend here is that year-over-year inventory, despite being negative for over a year, is now back in neutral territory. For a  true housing recovery, that inventory change needs to be dropping, not increasing, as it is doing here.

The last chart we have here is months of supply. This is a pretty astonishing graph, in that we are now at over a full year of supply! Even in the best of economic circumstances, clearing that kind of inventory takes a significant amount of time.

What does all this mean? It means buckle your seat belts, folks, because it’s gonna be a while before the housing market really sees a turnaround.

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24Aug10 National Association of Realtors – Home Sales Much Worse Than Expected, Down 27% – Worst Drop Since 1968

Very interesting video and article by the Associated Press today along with commentary from the LA Times:

Some startling information from the AP this morning indicating that sales of previously owned homes are down over 27% in July. The credit for this has partially to do with the expiration of the federal tax credit for new home buyers.

This drop was worse than expected, and the Natinoal Association of Realtors (NAR) has said this is the worst drop since 1968, and home sales are at their lowest levels since 1995.

“From our vantage point, the first-time home-buyers credit pulled forward demand — by definition this is what stimulus measures achieve — however the issue this time is that there was so little demand to be pulled forward, the credit has left no demand for the summer,” Dan Greenhaus, chief economic strategist for Miller Tabak + Co., wrote in a research note Tuesday morning. “The result is exactly what we’re seeing: a near, if not outright, collapse in housing.”

Total housing inventory jumped 2.5% at the end of July to 3.98 million homes available for sale, representing a 12.5-month supply at the current pace, up from an 8.9-month supply in June. Raw unsold inventory is still 12.9% below the 4.58 million in July 2008.

What does this mean? It means inventory is still very high, and home prices can be expected to stay suppressed for some time to come. Additionally; you can expect the short sale and foreclosure pace to continue for some time.

What are your thoughts? Post ‘em in the comments!

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