The Latest on Short Sales and Loan Modifications
The Latest on Short Sales and Loan Modifications
Let's say the median priced home in the US is about $240,000. According to the news, there are about $10 Million homes somewhere in the foreclosure process. So the idea is to give these qualified homeowners a loan modification to reduce the interest rate such that the new payment is 31% of their gross income, or less.
OK so the homeowner works on a loan modification, whereby the interest rate is reduced from a painful rate of 7-12 percent to a good rate of say, 4-5 percent. And the homeowner can qualify at the 31% level. The bank either piles the arrearages on top of the principal or they discount it.
Now comes the big challenge. It seems to me (and I do a lot of foreclosures), that the "value" of the property in foreclosure is conservatively worth about 30 percent less than the $240,000 owed.
So then we ask, are homeowners going to want a new $240,000 loan (that has been modified with a lower payment) on a property with a current value of say, $168,000?
Now we are back to where be started.
If the average $240,000 house in foreclosure has lost $72,000 in value, can the bailout money cover this for 10 Million homes?
Let's do some math:
10,000,000 houses * $72,000 lost on each home = $720 Billion Needed
Ouch.
So in gross numbers, it looks like $75 billion is about 10 percent of what could be needed to keep our current flood of homeowners in their properties.
The $75 Billion number equates to about $7,500 for each homeowner to have their arrearages adjusted (about 2-6 mortgage payments).
Contrary to what most people think, there are several exit strategies that exist with short sales. I'll cover three in this article.
Exit Strategy Number 1: This is the easiest strategy, whereby the investor acts as a debt negotiator for the deal and is compensated by receiving a fee for their services. There can be many variations to this, including real estate agents on both sides of the transaction.
Exit Strategy Number 2: This strategy is commonly referred to "flipping properties." In this strategy, the investor submits a wholesale offer on a property and (normally) does the debt negotiation with the lender(s). In parallel, the investor searches for a new buyer. The idea is to negotiate a wholesale price with the lender that is lower than what a "retail" buyer would offer for the property. The spread between purchase and re-sale has to be large enough to cover the closing costs for two closings.
Two closings are normally needed because the wholesale purchase has to close with the foreclosing lender, and then another closing with the retail buyer. I have done numerous of these closings and the techniques and paperwork seem to change almost daily. These are more complicated than advertized and require a funding source (e.g., flash cash) for the wholesale purchase.
Exit Strategy Number 3: This strategy would be referred to as a "fix and flip" or a "fix and hold" transaction. The idea is the same as the wholesale strategy in Strategy 2, except the investor owns the property for a period of time and performs a certain amount of repair on the property. The property is then put on the market to be sold or tenanted. This strategy can have the most risk because of several factors, including purchase costs and holding costs, ineffective repair work or costs, or downward trending market effects.
After these strategies are mastered, the savvy real estate investor can profitably maneuver through many more types of deals.
The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.
We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.
To Your Success,
Tom & Svein
Are wholesales diamond and jewelry really rare Get More Sales With Pay Per Lead and Appointment Setting New Harmonized Sales Tax - Critical Considerations by BC Renters Importance Of CRM in Sales How To Ease The Squeeze With eBay Pulse and Fine Tune Your Research For Successful Sales Creating an Effective Sales Copy Hiring a Short Sales Realtor: Not at All a Cake walk Just What Exactly Is A Sales Page Patent - the protection for manufacturing novel wholesale products We Are All in Sales How the Web Has Increased ShopNBC's Sales How to Produce a Video Sales Page That Works How to Use Consultative Selling Techniques to Get That Great Sales Job