eCourse for Flipping Short Sales Module 2 Checklist
Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender
Seven Streams Flipping Short Sales MethodTM Lesson #8 Checklist – The Critically Important Package for the Lender ***This condensed version of the main lesson is for review purposes only. For an in-depth explanation of each of the items listed here, please refer to the main PDF file or the MP3 audio version.
Why is the Lender Package Critically important? First of all, neither the lender nor the mortgage servicer really knows anything about the house. They can get a little information from the original mortgage paperwork but that mostly gives a legal description of the property. It doesn’t talk about the condition the house is actually in except maybe an inspection that was done years ago. Nor does it tell them anything about the current real estate market in that specific region of the country
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender By the time you finish this week’s eClass, you will know exactly how to convince the lender that the short sale price you are offering is the best they can do and procrastinating will only cause the value to decline. Here’s this week’s goal
You will give the pictures to make them feel like that are at the property.
They will understand everything that is wrong with the property.
They will understand what has happened to the regional real estate market over the last several years.
They will understand what has happened in the local market where the property is located.
They will understand why the house is not a good fit for the neighborhood it is located in.
They will understand that the borrower can’t bring the mortgage current and resume making payments.
They will understand in no uncertain terms that the short sale will net them more money for the house than foreclosing and selling it as REO. And once they understand all of that information they will approve the short sale. By the end of this week, you’ll specifically have the following things in place:
The secrets to earning a huge income by “short flipping”
How to get real estate agents to bring deals to YOU – so you don’t have to go out and beat the bushes looking for deals
How you can negotiate a price with the lender that’s far lower than what anyone else can negotiate - just by using these special methods
Why the more things that are wrong with a house, the better your chances of negotiating a better price with the lender
Why using a purchase option agreement to tie up a property is the best way to go © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender What skills you will need on your team shortly after beginning business – and why you don’t have to pay these people until after the deal closes
How to make huge profits without using any of your money – even if you have terrible credit
THIS WEEK’S OBJECTIVE You will be learning very specialized techniques that What accomplish the amazing task of convincing a hardened you’re lender to not only accept a short sale but a short sale going to on the wholesale market instead of the retail market. learn You need to pay close attention because you really can’t skip any of the steps taught here and expect the lender to realize it really is a good deal to accept a price much lower than is owed. The secret is in you knowing the avalanche of costs the lender will be buried with if he forecloses on the property. The key lies in gathering the right information and presenting it to the lender in a manner that he realizes you know what you are doing and have found a way to help a bunch of people out of a bad situation.
Inexperienced homeowners trying to short sale their house are watching potential buyers walk away as months pass while they deal with lenders' lengthy delays, lost documents, and unreturned calls, according to the National Association of Realtors (NAR). Not all the snafus are lenders' fault; inexperienced real estate agents who fail to turn in complete paperwork also are causing holdups, as are severely under priced homes. One of the keys from this lesson targets the exact problem most people have getting their short sale approved….
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Abnormalities in short sale come in all forms. Here are a few you can expect: Things to Complications on the title that need to be corrected look out before you can sign a purchase agreement. for Unusual ownership arrangements where trusts or another
entity is on the title and it needs to be moved back to the owner that is approving the short sale. Another time to contact your attorney is if the seller or anyone else presents a document to you that seems unusual or not easily understood. Contract provisions you’ll definitely want in both your purchase agreement and purchase option agreement include: “Contingent on lender approval” or “Contingent on third What you need party approval” to include Also disclose anything specific about you. This might include that you are a Realtor. in your paper and .. work Definitely disclose that you intend to resell the house for a
profit. Having the disclosure that you intend reselling the house at a profit means that you don’t have to explicitly tell the lender you are doing so. The lender has a due diligence responsibility to read that statement in the agreements. Also, record the purchase option agreement with the court house. That makes all of your disclosures public record and will protect you from someone coming along and claiming they were not made aware you were going to flip the house. What you do is have your attorney create the language for your disclosures and contingencies that you include with the standard paperwork. And while you’re at it, have your local real estate association’s attorney look over the paperwork created by your attorney. They’ll be much more conservative and will probably balk at what © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender you are trying to do. But still have them look at. Then take those concerns back to your attorney and have him/her decide if they want to make any changes based on the association’s attorney’s concerns. There you have it – iron clad paperwork that will get the job done without causing you headaches down the road.
Preparing and Presenting an Authoritative Short Sale Package to the Lender Flipping short sales means you need to buy the house substantially below what you can sell it for. You need to buy at wholesale prices. That means convincing the lender that this is the best price they can get in today’s market. Just as the NAR notes that most short sales fail because there is paperwork and information missing, the secret to getting a short sale flip approved is filling in that information gap. I’m talking about: This is 3 or more CMA – yes multiple Competitive Marketing what Analysis on the same house. others leave out Local marketing data over the last several years and a forecast going forward. With all the REOs on the market but when you and with short sales becoming a growing solution, include it downward pressure will remain on prices for years to will get come. your deal approved Realistic (pessimistic) feedback from local realtors. Subject property photos – lots and lots of them. Continuing market contraction forecasts. A accurate monetary comparison between what the
lender will net from your short sale versus selling it as REO – critically important and must be convincing. Summary of your short sale offer. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender What Every Lender Should Know By Now This is REO houses almost always sell for less than comparable homes why that have not gone through foreclosure. People get angry about lenders the foreclosure and trash the places.
are allowing Making it even tougher on the lenders is that foreclosed homes more short add tens and tens of thousands in expenses that short sales don’t. That’s why lenders are now ramping up their short sale sales
departments. It cuts their losses.
In fact, analysis from Freddie Mac and large banks show that their cost to foreclose on a house is in the range of $60,000 on average. You will find deals with even more than the $60,000 average spread
That information is like gold to you for flipping short sales. It means on average you have almost a $60,000 spread in what you can buy the house for and what you can sell it for and still get the lender to accept because it costs them less than foreclosure. Let’s say you leave 15% as a buffer between what the lender gets from the short sale and what they would get as REO. Using the industry average that works out to $51,000 for your profit spread. ($60,000 X 15% = $9,000 and $60,000 - $9,000 = $51,000). You’ll have other expenses in the deal that will bring that spread down but it’s a good place to start from. Don’t forget you can tap into up to seven income streams during the flip that will leave you with a very handsome profit. Delinquency Period Costs to the Lender Lenders and servicers begin incurring costs as soon as a borrower falls the first 30 days behind in payments. Many of these are time-dependent costs that continue to grow as long as the loan is delinquent, in foreclosure, or in the REO sales process. These costs include: Lost principal and interest payments. In the case of a loan
held in a lender’s portfolio, the lender incurs this loss directly. Where a loan has been securitized, the servicer incurs costs because transaction agreements usually require © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender that they continue forwarding principal and interest payments to investors, using their own funds or borrowed funds, as long as the loan remains in the security. This is a big incentive to short sale the house to remove it from the security. Tax and insurance payments. The lender or servicer is
responsible for making these payments, if the terms of the loan call for these items to be escrowed, whether or not the borrower is making monthly mortgage payments. These obligations continue until the borrower resumes making payments or the property is sold. Maintaining the property. If the borrower is not properly
maintaining the home, the lender or servicer is responsible for the ongoing costs of maintaining the property. This can include paying for lawn maintenance, securing the property, complying with safety codes, winterizing the property (where necessary), and homeowners association or condo fees, if relevant. These expenses continue until the property is sold. Lost servicing fee income. A servicer loses its servicing fee
when a loan is delinquent as this fee comes out of the monthly payment received from the borrower. Costs of collection efforts / servicing. Servicing delinquent
loans requires additional servicer resources, which can be up to three times the cost of servicing a current loan. By mid 2009, every major lender was ramping up there collection department to deal with the ever growing increase in foreclosures. The same with their loss mitigation departments that have to deal with loan mods, short sales, and REO. Foreclosure and post-foreclosure costs Most of the listed pre-foreclosure costs are time-dependent costs that the lender and servicer continue to accumulate throughout the foreclosure process. Additionally, there are several one-time transaction costs that occur once foreclosure has been initiated. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Legal costs for handling the foreclosure. The lender or
servicer incurs legal expenses in all jurisdictions. Legal expenses are higher in judicial foreclosure states. Additionally, a personal bankruptcy proceeding often accompanies foreclosure. This further pushes up the legal costs for the lender or servicer who must also be represented in that proceeding. Administrative fees. Court fees, fees to publicize
foreclosure notices, auctioneer fees, and title fees must all be paid. In some states, the local sheriff manages and conducts the foreclosure sale or auction. Sheriffs’ fees also vary widely, but can be as much as four to five percent of the value of the property. Once the lender has taken possession of and title to the property through a foreclosure auction or sale, it has to prepare and market the home for sale. These expenses can be significant, accounting for over 40 percent of foreclosure-related gross losses. The main expenses during this phase of the process are: Costs of restoring the property to saleable condition.
Often homes of borrowers in financial distress fall into disrepair, requiring significant repairs, and capital improvements (including painting, plumbing repairs, replacing appliances and carpeting, and repairing water damage). And many previous owners are very angry with the bank for putting them in a predatory loan. They might seriously trash the house on the way out. Real estate commissions. Lenders typically use real
estate agents to sell REO, which means commissions are paid upon sale. Another full 6% of the value that the house sells for. Loss on REO sale The last step that creates a major expense for investors and servicers is the loss on the unpaid principal balance that occurs upon the sale of the REO. Loss of capital.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender REO properties generally do not attract top dollar, and
once sale proceeds are netted against the various costs incurred during the delinquency period and foreclosure process, the investor, and lender usually end up with losses. These losses make up approximately 20 percent of the
total costs of foreclosure. The current softness of the housing market could push this rate even higher. That’s a lot of expense to the lender. You’d think they would all go bankrupt next week. But they won’t. Next we’ll look at other sources of income the lender get paid from to soften the blow. Your “Assignment” for Stage #1 Study the examples in the REO to SS Comparison & Profit Calculator Spreadsheet. Consider the differences between REO and Short Sales. Nonpayment on the loan stops in 3 months instead of a year with a short sale. Insurance and homeowner association fees stop in a couple of months rather than going on for a year of more. Use the spreadsheet to show your profit running different scenarios. Send any questions or comments about the material to me by logging into the Lesson page at: www.sevenstreamsflipping.org/e-classes2
Other Ways the Lender is Seriously Compensated Short sales are not nearly as bad for the lender as they would have you think
Presented here are other serious reasons why neither you nor the lender should harbor reservations about you making a decent profit flipping a short sale. The Big Mortgage Bailout All of the government financing, Obama’s Making Home Affordable program, plays a big role here. The major lenders are
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender being paid big money to get the real estate industry functioning correctly again after they made a tremendous mess of it. The money offsets part of their loss in a short sale. Same for PMI, VA, and FHA homeowners insurance that we’ll get into in a moment. Your Your role as a short sale flipper is to help smooth and expedite positive the process with an offer and complete package the lender needs role in to make the best business decision. the deal
The Role of Mortgage Insurance Some loans carry mortgage insurance that can help servicers and lenders recover some of the costs of foreclosure. Ask the seller of the property if they have mortgage insurance so that you can include it in your calculation. This can be a critically important calculation and be the key to being able to flip a short sale. Mortgage insurance can be in the form of FHA mortgage insurance, a Veterans Administration or other federal loan guaranty, or private mortgage insurance (PMI). FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance. Mortgage insurance claims are typically made once the lender or servicer has taken title to the property. Mortgage insurance can reimburse a servicer or lender for costs including unpaid interest payments, advances of taxes and interest, legal fees, and maintenance costs. It’s a big deal. Additionally, mortgage insurance does not reimburse for expenses such as capital improvements needed to bring a foreclosed property to salable condition, real estate agent commissions, tax and insurance payments made after the foreclosure sale and before the REO sale, and seller concessions that the lender or servicer may offer to effect an REO sale. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Mortgage insuranc e is not required to pay in a short sale
And here’s a catch about PMI in the short sale scenario. The insurance company is normally only required to pay out the insurance after the foreclosure is complete. But they will often agree with the lender that a short sale is the best answer. Of course, with a short sale there is no foreclosure. Technically, the PMI does not have to pay. But they will with a catch. The catch is they often require the seller to sign a promissory note for a portion of the insurance they payout. Up to about 50%. That way they get some of the advantage of the short sale by covering a portion of what they would owe the lender if it was a foreclosure. Now, you can use this information to your advantage. You know the lender will recover the PMI whether it is a foreclosure or short sale. It becomes a wash. You will want to account for it in your comparison of REO to short sale but it goes into both columns.
Quite possibly, the lender won’t have any loss at all
Being in both columns, you’d think it doesn’t significantly change the bottom line but its does. In a short sale, it can easily make the lender whole – meaning no loss. While the added costs of foreclosure still leave the lender deep in the hole. If you can get a copy of the seller’s PMI documents, you can figure out how much the lender will get back from them. You want this large number in your calculations. There’s a place on the Excel worksheet for it to be included.
Your “Assignment” for Stage #2 Go back to the spreadsheet and look closely at how PMI affects getting your short sale approved. How means the lender might not lose anything at all in a short sale. Send any questions or comments about the material to me by logging into the Lesson page at: www.sevenstreamsflipping.org/e-classes2 © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender
What Your Listing Agent Does for You The purchase option agreement serves four primary purposes: The POA 1. Gains your ability to purchase the property within a specified time period for a specified amount of money (although it is a critical won’t be your own money). tool for 2. Public document that records your disclosures. you
3. Title seasoning by giving you a principle position in the property. 4. Protects you from claims of fraud when you fully disclose any real estate license you have, your intent to resell at a profit, and any other disclosures you need to make. A properly recorded purchase option agreement prevents anyone form coming back after the transaction to claim they were miss led on the short sale. The purchase agreement and the purchase option agreement need to cross reference each other. If you’re not an agent or a broker and don’t have a real estate license, the purchase option agreement serves another important function by making you a principle on the title. Someone with a vested interest in the property. Someone with certain rights to the property. In one sense, a lien holder that must be overcome before the title can be transferred from the current owner to a new owner – your end buyer. How to Best Work With Your Brokers Some of the best short sale deals are those where the property has What your serious problems. Problems that bring the price down a brokers disproportionate amount related to the property’s true market need to value. know
Here’s how to get the seller to disclose problems with the property: The real estate broker is responsible for finding all of the
problems with the property and bringing them to your © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender attention by taking photos. The broker also has access to local forms to document the problems. They need to ask the seller about every problem and seek
out even problems the seller is not aware of. This is all part of their normal course of business. Almost every, if not every, state requires brokers to carry
“errors and omission” insurance that can cover an overlooked problem that might come up after the sale. Here’s how to get started working with your broker: Have a conversation with them about the Seven Streams
Short Sale MethodTM. Find out if they regularly perform in the short sale market.
The more volume in short sales, the better. Best if they are
already an expert in the short sale process. Your role is to teach them a more profitable way of going about it. Remember they are going to be the listing agent not only on
the first deal but also to find your end buyer. Here’s how the broker structures the commissions: The listing agent signs a listing agreement with the current
homeowner for a 6% commission to be split between themselves and the selling agent. In turn, both the listing and selling agents are obligated to split their portion of the commission with their brokers. Currently 99% of major lenders are paying the full 6%
commission out of the sale proceeds even when it is a short sale. Here’s another income stream
If you (as a principle) are an agent or broker, you get your
half of the commission (3%) as the selling agent representing yourself in the first transaction. The listing agent that brings you the deal to get their half of the commission. Now you list the property for resale with the same agent to
sell it for you to the end buyer. List it with the full 6% commission. Make your broker happy so they bring you the next and best deals because they want to work with you. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender You don’t take any commission in the second sale. In reality, the original agent only gets the 3% listing commission on the resale. Most often, another agent enters the resale transaction with the end buyer and collects the selling agents 3% commission. However, in theory, the listing agent could bring in the end buyer to collect a full 9% commission on the total flip. Don’t try to negotiate them down based on volume business. What the Listing Agent Contributes to the Short Sale Package For the round trip commission, your broker is responsible for contributing quite a bit of material to the package you will submit to the lender as proof the short sale is their best option. This all The broker provides the comparisons that will be included. part of They give you a ballpark price of what you should offer to their buy the property for. Remember, this offer is going to the normal lender in reality. Not the seller that the broker has a services fiduciary responsibility to. That fiduciary responsibility to but they the seller is very limited since they won’t receive a penny in may have to the deal. go a A ball park price of what it can be sold for in 60 days or little less. further They use recent local sales to determine the offer price. They’ll look at recent new listings to determine what the
resale will be competing with. They will also research other comparables to provide
reasons why they don’t accurately apply to your particular property – your defense against the lenders BPO. Lack of upgrades for an older house and the value of the missing upgrades. Outdated heating electrical, hot water tanks, etc. Whatever lowers the value of the property. They take a ton of photos at probably 50 to 100.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender A dozen photos of the exterior, every angel and closeups of problem areas like a damaged or worn out roof. The photos should make the loss mitigator feel like they are standing on the property even though they are a thousand miles away. Everything that needs to be communicated effectively to allow them to make their decision. Five Key Pieces of Information the Lender Needs 1. Document the local or state real estate market over time This some thing others fail to provide
Compared to 1, 2, and 3 years ago. Go back to when the
market was at its peak or when the loan was originated. The current average days a similar property is on the
market, use categories like single family homes, 2 family homes, 4-plexes, condominiums, etc. Include the list price to sales price ratio. Include the average sales price State that the real estate market has fallen X% since the
loan was originated. Your broker provides this information from the local MLS.
2. Repeat the steps from number one above for the town / city /local market that applies to the short sale house. Include a statement like – “While state house values have declined X%, local values have declined much further to Y%.” 3. Next describe the particular property’s fit into the local market. Your comparables come in here. The property is large, smaller, older than the average
property in the local area. 4. The homeowner’s hardship story that convinces that lender if they don’t take the short sale they will certainly receive the property back in a very expensive foreclosure. 5. Summarize the presentation and offer. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Photos Graphs of the real estate market Conclusive proof the owners cannot continue to make
payments Your “Assignment” for Stage #3 Study and fully understand the sample package provided as a MS PowerPoint presentation. Begin putting together your own standard template for building short sale packages. Send any questions or comments about the material to me by logging into the Lesson page at: www.sevenstreamsflipping.org/e-classes2 Next time you’ll learn in great detail exactly how to counter the lenders BPO and get them to see the property through your eyes.
Richard Geller Publisher, Seven Streams Flipping Short Sales MethodTM
P.S. Be sure to review all of the materials that are included with this week’s curriculum package. You should have received six other files: 1. eCourse for Flipping Short Sales Module 8 – The Critically Important Package for the Lender 2. eCourse for Flipping Short Sales Module 8 – REO to SS & Profit Calculator Spreadsheet 3. eCourse for Flipping Short Sales Module 8 – Sample Purchase Option Agreement 4. eCourse for Flipping Short Sales Module 8 – Sample Package for Lender 5. eCourse for Flipping Short Sales Module 8 – Checklist for Sellers © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender 6. eCourse for Flipping Short Sales Module 8 – Client Forms
© 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8 Checklist – The Critically Important Package for the Lender ***This condensed version of the main lesson is for review purposes only. For an in-depth explanation of each of the items listed here, please refer to the main PDF file or the MP3 audio version.
Why is the Lender Package Critically important? First of all, neither the lender nor the mortgage servicer really knows anything about the house. They can get a little information from the original mortgage paperwork but that mostly gives a legal description of the property. It doesn’t talk about the condition the house is actually in except maybe an inspection that was done years ago. Nor does it tell them anything about the current real estate market in that specific region of the country
© 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender By the time you finish this week’s eClass, you will know exactly how to convince the lender that the short sale price you are offering is the best they can do and procrastinating will only cause the value to decline. Here’s this week’s goal
You will give the pictures to make them feel like that are at the property.
They will understand everything that is wrong with the property.
They will understand what has happened to the regional real estate market over the last several years.
They will understand what has happened in the local market where the property is located.
They will understand why the house is not a good fit for the neighborhood it is located in.
They will understand that the borrower can’t bring the mortgage current and resume making payments.
They will understand in no uncertain terms that the short sale will net them more money for the house than foreclosing and selling it as REO. And once they understand all of that information they will approve the short sale. By the end of this week, you’ll specifically have the following things in place:
The secrets to earning a huge income by “short flipping”
How to get real estate agents to bring deals to YOU – so you don’t have to go out and beat the bushes looking for deals
How you can negotiate a price with the lender that’s far lower than what anyone else can negotiate - just by using these special methods
Why the more things that are wrong with a house, the better your chances of negotiating a better price with the lender
Why using a purchase option agreement to tie up a property is the best way to go © 2009 SevenStreamsFlipping .org. All rights reserved.
2
www.sevenstreamsflipping.org
Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender What skills you will need on your team shortly after beginning business – and why you don’t have to pay these people until after the deal closes
How to make huge profits without using any of your money – even if you have terrible credit
THIS WEEK’S OBJECTIVE You will be learning very specialized techniques that What accomplish the amazing task of convincing a hardened you’re lender to not only accept a short sale but a short sale going to on the wholesale market instead of the retail market. learn You need to pay close attention because you really can’t skip any of the steps taught here and expect the lender to realize it really is a good deal to accept a price much lower than is owed. The secret is in you knowing the avalanche of costs the lender will be buried with if he forecloses on the property. The key lies in gathering the right information and presenting it to the lender in a manner that he realizes you know what you are doing and have found a way to help a bunch of people out of a bad situation.
Inexperienced homeowners trying to short sale their house are watching potential buyers walk away as months pass while they deal with lenders' lengthy delays, lost documents, and unreturned calls, according to the National Association of Realtors (NAR). Not all the snafus are lenders' fault; inexperienced real estate agents who fail to turn in complete paperwork also are causing holdups, as are severely under priced homes. One of the keys from this lesson targets the exact problem most people have getting their short sale approved….
© 2009 SevenStreamsFlipping .org. All rights reserved.
3
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Abnormalities in short sale come in all forms. Here are a few you can expect: Things to Complications on the title that need to be corrected look out before you can sign a purchase agreement. for Unusual ownership arrangements where trusts or another
entity is on the title and it needs to be moved back to the owner that is approving the short sale. Another time to contact your attorney is if the seller or anyone else presents a document to you that seems unusual or not easily understood. Contract provisions you’ll definitely want in both your purchase agreement and purchase option agreement include: “Contingent on lender approval” or “Contingent on third What you need party approval” to include Also disclose anything specific about you. This might include that you are a Realtor. in your paper and .. work Definitely disclose that you intend to resell the house for a
profit. Having the disclosure that you intend reselling the house at a profit means that you don’t have to explicitly tell the lender you are doing so. The lender has a due diligence responsibility to read that statement in the agreements. Also, record the purchase option agreement with the court house. That makes all of your disclosures public record and will protect you from someone coming along and claiming they were not made aware you were going to flip the house. What you do is have your attorney create the language for your disclosures and contingencies that you include with the standard paperwork. And while you’re at it, have your local real estate association’s attorney look over the paperwork created by your attorney. They’ll be much more conservative and will probably balk at what © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender you are trying to do. But still have them look at. Then take those concerns back to your attorney and have him/her decide if they want to make any changes based on the association’s attorney’s concerns. There you have it – iron clad paperwork that will get the job done without causing you headaches down the road.
Preparing and Presenting an Authoritative Short Sale Package to the Lender Flipping short sales means you need to buy the house substantially below what you can sell it for. You need to buy at wholesale prices. That means convincing the lender that this is the best price they can get in today’s market. Just as the NAR notes that most short sales fail because there is paperwork and information missing, the secret to getting a short sale flip approved is filling in that information gap. I’m talking about: This is 3 or more CMA – yes multiple Competitive Marketing what Analysis on the same house. others leave out Local marketing data over the last several years and a forecast going forward. With all the REOs on the market but when you and with short sales becoming a growing solution, include it downward pressure will remain on prices for years to will get come. your deal approved Realistic (pessimistic) feedback from local realtors. Subject property photos – lots and lots of them. Continuing market contraction forecasts. A accurate monetary comparison between what the
lender will net from your short sale versus selling it as REO – critically important and must be convincing. Summary of your short sale offer. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender What Every Lender Should Know By Now This is REO houses almost always sell for less than comparable homes why that have not gone through foreclosure. People get angry about lenders the foreclosure and trash the places.
are allowing Making it even tougher on the lenders is that foreclosed homes more short add tens and tens of thousands in expenses that short sales don’t. That’s why lenders are now ramping up their short sale sales
departments. It cuts their losses.
In fact, analysis from Freddie Mac and large banks show that their cost to foreclose on a house is in the range of $60,000 on average. You will find deals with even more than the $60,000 average spread
That information is like gold to you for flipping short sales. It means on average you have almost a $60,000 spread in what you can buy the house for and what you can sell it for and still get the lender to accept because it costs them less than foreclosure. Let’s say you leave 15% as a buffer between what the lender gets from the short sale and what they would get as REO. Using the industry average that works out to $51,000 for your profit spread. ($60,000 X 15% = $9,000 and $60,000 - $9,000 = $51,000). You’ll have other expenses in the deal that will bring that spread down but it’s a good place to start from. Don’t forget you can tap into up to seven income streams during the flip that will leave you with a very handsome profit. Delinquency Period Costs to the Lender Lenders and servicers begin incurring costs as soon as a borrower falls the first 30 days behind in payments. Many of these are time-dependent costs that continue to grow as long as the loan is delinquent, in foreclosure, or in the REO sales process. These costs include: Lost principal and interest payments. In the case of a loan
held in a lender’s portfolio, the lender incurs this loss directly. Where a loan has been securitized, the servicer incurs costs because transaction agreements usually require © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender that they continue forwarding principal and interest payments to investors, using their own funds or borrowed funds, as long as the loan remains in the security. This is a big incentive to short sale the house to remove it from the security. Tax and insurance payments. The lender or servicer is
responsible for making these payments, if the terms of the loan call for these items to be escrowed, whether or not the borrower is making monthly mortgage payments. These obligations continue until the borrower resumes making payments or the property is sold. Maintaining the property. If the borrower is not properly
maintaining the home, the lender or servicer is responsible for the ongoing costs of maintaining the property. This can include paying for lawn maintenance, securing the property, complying with safety codes, winterizing the property (where necessary), and homeowners association or condo fees, if relevant. These expenses continue until the property is sold. Lost servicing fee income. A servicer loses its servicing fee
when a loan is delinquent as this fee comes out of the monthly payment received from the borrower. Costs of collection efforts / servicing. Servicing delinquent
loans requires additional servicer resources, which can be up to three times the cost of servicing a current loan. By mid 2009, every major lender was ramping up there collection department to deal with the ever growing increase in foreclosures. The same with their loss mitigation departments that have to deal with loan mods, short sales, and REO. Foreclosure and post-foreclosure costs Most of the listed pre-foreclosure costs are time-dependent costs that the lender and servicer continue to accumulate throughout the foreclosure process. Additionally, there are several one-time transaction costs that occur once foreclosure has been initiated. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Legal costs for handling the foreclosure. The lender or
servicer incurs legal expenses in all jurisdictions. Legal expenses are higher in judicial foreclosure states. Additionally, a personal bankruptcy proceeding often accompanies foreclosure. This further pushes up the legal costs for the lender or servicer who must also be represented in that proceeding. Administrative fees. Court fees, fees to publicize
foreclosure notices, auctioneer fees, and title fees must all be paid. In some states, the local sheriff manages and conducts the foreclosure sale or auction. Sheriffs’ fees also vary widely, but can be as much as four to five percent of the value of the property. Once the lender has taken possession of and title to the property through a foreclosure auction or sale, it has to prepare and market the home for sale. These expenses can be significant, accounting for over 40 percent of foreclosure-related gross losses. The main expenses during this phase of the process are: Costs of restoring the property to saleable condition.
Often homes of borrowers in financial distress fall into disrepair, requiring significant repairs, and capital improvements (including painting, plumbing repairs, replacing appliances and carpeting, and repairing water damage). And many previous owners are very angry with the bank for putting them in a predatory loan. They might seriously trash the house on the way out. Real estate commissions. Lenders typically use real
estate agents to sell REO, which means commissions are paid upon sale. Another full 6% of the value that the house sells for. Loss on REO sale The last step that creates a major expense for investors and servicers is the loss on the unpaid principal balance that occurs upon the sale of the REO. Loss of capital.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender REO properties generally do not attract top dollar, and
once sale proceeds are netted against the various costs incurred during the delinquency period and foreclosure process, the investor, and lender usually end up with losses. These losses make up approximately 20 percent of the
total costs of foreclosure. The current softness of the housing market could push this rate even higher. That’s a lot of expense to the lender. You’d think they would all go bankrupt next week. But they won’t. Next we’ll look at other sources of income the lender get paid from to soften the blow. Your “Assignment” for Stage #1 Study the examples in the REO to SS Comparison & Profit Calculator Spreadsheet. Consider the differences between REO and Short Sales. Nonpayment on the loan stops in 3 months instead of a year with a short sale. Insurance and homeowner association fees stop in a couple of months rather than going on for a year of more. Use the spreadsheet to show your profit running different scenarios. Send any questions or comments about the material to me by logging into the Lesson page at: www.sevenstreamsflipping.org/e-classes2
Other Ways the Lender is Seriously Compensated Short sales are not nearly as bad for the lender as they would have you think
Presented here are other serious reasons why neither you nor the lender should harbor reservations about you making a decent profit flipping a short sale. The Big Mortgage Bailout All of the government financing, Obama’s Making Home Affordable program, plays a big role here. The major lenders are
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender being paid big money to get the real estate industry functioning correctly again after they made a tremendous mess of it. The money offsets part of their loss in a short sale. Same for PMI, VA, and FHA homeowners insurance that we’ll get into in a moment. Your Your role as a short sale flipper is to help smooth and expedite positive the process with an offer and complete package the lender needs role in to make the best business decision. the deal
The Role of Mortgage Insurance Some loans carry mortgage insurance that can help servicers and lenders recover some of the costs of foreclosure. Ask the seller of the property if they have mortgage insurance so that you can include it in your calculation. This can be a critically important calculation and be the key to being able to flip a short sale. Mortgage insurance can be in the form of FHA mortgage insurance, a Veterans Administration or other federal loan guaranty, or private mortgage insurance (PMI). FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance. Mortgage insurance claims are typically made once the lender or servicer has taken title to the property. Mortgage insurance can reimburse a servicer or lender for costs including unpaid interest payments, advances of taxes and interest, legal fees, and maintenance costs. It’s a big deal. Additionally, mortgage insurance does not reimburse for expenses such as capital improvements needed to bring a foreclosed property to salable condition, real estate agent commissions, tax and insurance payments made after the foreclosure sale and before the REO sale, and seller concessions that the lender or servicer may offer to effect an REO sale. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Mortgage insuranc e is not required to pay in a short sale
And here’s a catch about PMI in the short sale scenario. The insurance company is normally only required to pay out the insurance after the foreclosure is complete. But they will often agree with the lender that a short sale is the best answer. Of course, with a short sale there is no foreclosure. Technically, the PMI does not have to pay. But they will with a catch. The catch is they often require the seller to sign a promissory note for a portion of the insurance they payout. Up to about 50%. That way they get some of the advantage of the short sale by covering a portion of what they would owe the lender if it was a foreclosure. Now, you can use this information to your advantage. You know the lender will recover the PMI whether it is a foreclosure or short sale. It becomes a wash. You will want to account for it in your comparison of REO to short sale but it goes into both columns.
Quite possibly, the lender won’t have any loss at all
Being in both columns, you’d think it doesn’t significantly change the bottom line but its does. In a short sale, it can easily make the lender whole – meaning no loss. While the added costs of foreclosure still leave the lender deep in the hole. If you can get a copy of the seller’s PMI documents, you can figure out how much the lender will get back from them. You want this large number in your calculations. There’s a place on the Excel worksheet for it to be included.
Your “Assignment” for Stage #2 Go back to the spreadsheet and look closely at how PMI affects getting your short sale approved. How means the lender might not lose anything at all in a short sale. Send any questions or comments about the material to me by logging into the Lesson page at: www.sevenstreamsflipping.org/e-classes2 © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender
What Your Listing Agent Does for You The purchase option agreement serves four primary purposes: The POA 1. Gains your ability to purchase the property within a specified time period for a specified amount of money (although it is a critical won’t be your own money). tool for 2. Public document that records your disclosures. you
3. Title seasoning by giving you a principle position in the property. 4. Protects you from claims of fraud when you fully disclose any real estate license you have, your intent to resell at a profit, and any other disclosures you need to make. A properly recorded purchase option agreement prevents anyone form coming back after the transaction to claim they were miss led on the short sale. The purchase agreement and the purchase option agreement need to cross reference each other. If you’re not an agent or a broker and don’t have a real estate license, the purchase option agreement serves another important function by making you a principle on the title. Someone with a vested interest in the property. Someone with certain rights to the property. In one sense, a lien holder that must be overcome before the title can be transferred from the current owner to a new owner – your end buyer. How to Best Work With Your Brokers Some of the best short sale deals are those where the property has What your serious problems. Problems that bring the price down a brokers disproportionate amount related to the property’s true market need to value. know
Here’s how to get the seller to disclose problems with the property: The real estate broker is responsible for finding all of the
problems with the property and bringing them to your © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender attention by taking photos. The broker also has access to local forms to document the problems. They need to ask the seller about every problem and seek
out even problems the seller is not aware of. This is all part of their normal course of business. Almost every, if not every, state requires brokers to carry
“errors and omission” insurance that can cover an overlooked problem that might come up after the sale. Here’s how to get started working with your broker: Have a conversation with them about the Seven Streams
Short Sale MethodTM. Find out if they regularly perform in the short sale market.
The more volume in short sales, the better. Best if they are
already an expert in the short sale process. Your role is to teach them a more profitable way of going about it. Remember they are going to be the listing agent not only on
the first deal but also to find your end buyer. Here’s how the broker structures the commissions: The listing agent signs a listing agreement with the current
homeowner for a 6% commission to be split between themselves and the selling agent. In turn, both the listing and selling agents are obligated to split their portion of the commission with their brokers. Currently 99% of major lenders are paying the full 6%
commission out of the sale proceeds even when it is a short sale. Here’s another income stream
If you (as a principle) are an agent or broker, you get your
half of the commission (3%) as the selling agent representing yourself in the first transaction. The listing agent that brings you the deal to get their half of the commission. Now you list the property for resale with the same agent to
sell it for you to the end buyer. List it with the full 6% commission. Make your broker happy so they bring you the next and best deals because they want to work with you. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender You don’t take any commission in the second sale. In reality, the original agent only gets the 3% listing commission on the resale. Most often, another agent enters the resale transaction with the end buyer and collects the selling agents 3% commission. However, in theory, the listing agent could bring in the end buyer to collect a full 9% commission on the total flip. Don’t try to negotiate them down based on volume business. What the Listing Agent Contributes to the Short Sale Package For the round trip commission, your broker is responsible for contributing quite a bit of material to the package you will submit to the lender as proof the short sale is their best option. This all The broker provides the comparisons that will be included. part of They give you a ballpark price of what you should offer to their buy the property for. Remember, this offer is going to the normal lender in reality. Not the seller that the broker has a services fiduciary responsibility to. That fiduciary responsibility to but they the seller is very limited since they won’t receive a penny in may have to the deal. go a A ball park price of what it can be sold for in 60 days or little less. further They use recent local sales to determine the offer price. They’ll look at recent new listings to determine what the
resale will be competing with. They will also research other comparables to provide
reasons why they don’t accurately apply to your particular property – your defense against the lenders BPO. Lack of upgrades for an older house and the value of the missing upgrades. Outdated heating electrical, hot water tanks, etc. Whatever lowers the value of the property. They take a ton of photos at probably 50 to 100.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender A dozen photos of the exterior, every angel and closeups of problem areas like a damaged or worn out roof. The photos should make the loss mitigator feel like they are standing on the property even though they are a thousand miles away. Everything that needs to be communicated effectively to allow them to make their decision. Five Key Pieces of Information the Lender Needs 1. Document the local or state real estate market over time This some thing others fail to provide
Compared to 1, 2, and 3 years ago. Go back to when the
market was at its peak or when the loan was originated. The current average days a similar property is on the
market, use categories like single family homes, 2 family homes, 4-plexes, condominiums, etc. Include the list price to sales price ratio. Include the average sales price State that the real estate market has fallen X% since the
loan was originated. Your broker provides this information from the local MLS.
2. Repeat the steps from number one above for the town / city /local market that applies to the short sale house. Include a statement like – “While state house values have declined X%, local values have declined much further to Y%.” 3. Next describe the particular property’s fit into the local market. Your comparables come in here. The property is large, smaller, older than the average
property in the local area. 4. The homeowner’s hardship story that convinces that lender if they don’t take the short sale they will certainly receive the property back in a very expensive foreclosure. 5. Summarize the presentation and offer. © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender Photos Graphs of the real estate market Conclusive proof the owners cannot continue to make
payments Your “Assignment” for Stage #3 Study and fully understand the sample package provided as a MS PowerPoint presentation. Begin putting together your own standard template for building short sale packages. Send any questions or comments about the material to me by logging into the Lesson page at: www.sevenstreamsflipping.org/e-classes2 Next time you’ll learn in great detail exactly how to counter the lenders BPO and get them to see the property through your eyes.
Richard Geller Publisher, Seven Streams Flipping Short Sales MethodTM
P.S. Be sure to review all of the materials that are included with this week’s curriculum package. You should have received six other files: 1. eCourse for Flipping Short Sales Module 8 – The Critically Important Package for the Lender 2. eCourse for Flipping Short Sales Module 8 – REO to SS & Profit Calculator Spreadsheet 3. eCourse for Flipping Short Sales Module 8 – Sample Purchase Option Agreement 4. eCourse for Flipping Short Sales Module 8 – Sample Package for Lender 5. eCourse for Flipping Short Sales Module 8 – Checklist for Sellers © 2009 SevenStreamsFlipping .org. All rights reserved.
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Seven Streams Flipping Short Sales MethodTM Lesson #8: The Critically Important Package for the Lender 6. eCourse for Flipping Short Sales Module 8 – Client Forms
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