In today’s real estate market, many homeowners, as well as investors, are going down roads and using various tools that they would not have considered previously. When things are going well and the real estate market is hot, most people would believe that the good times are here to stay. Unfortunately, good times were at the peak of the roller coaster, and the market came down twice as fast as it went up. In many areas, prices fell back to where they were eight years ago, before the real estate frenzy started. When times are going well, we all know how to act. “Yippee, hurray, woopdedo, woopdedo!” When times get tough, that is when the real investor shows his true moxie.
There comes a point, when the market is crashing, when you have to ask yourself: “Is this house worth keeping?” For an investor, it is usually a just financial decision. Some people do not want to sell because they will lose too much money. The sad part is that they have already lost their equity. Why ride a horse with a bad leg? Something that has become common in this market is the short sale. A short sale is when a property has fallen in value below its mortgage amount, and the bank is willing to accept less than the amount owed. In the past, most banks would not have agreed to this. Today, there are too many houses that are being foreclosed on, and to the banks, this is the lesser of two evils.
Here is my experience, with an investor I know of, with two different short sales. House A was purchased at the peak of the market for $230,000. The loan was with a bank that he has done much business with. The investor had an eight year relationship with this bank. The original loan officer was a terrific guy, who was great to deal with. Unfortunately, he lost a battle to cancer. Afterwards, the investor was switched around to a few different people. He ended up with a gentleman we will call Dan. (That is actually his real name). He made Dan aware of his history with the bank, and what his intentions were. The area in question has been hit hard by the real estate crash. The property in question was on the market for sale. He was advised by Dan to send in an offer when he received one.
The property was originally listed for $80,000 with a real estate agent. The loan amount was $130,000. After not getting any showings, they gradually reduced the price. When it was listed for $60,000, they received an offer for $54,000. This was an all cash, 30 day close offer. He sent all of the information in to Dan, and was told to counter the offer at $67,000. He did, and the buyer came up to $58,500. All cash, 30 day close. In this market, that is very good. They had an inspection done on the house, and it was confirmed that it needed repair work; it has an original roof, and an original air conditioner. Dan turned down this offer, and said to sell it for no less than $64,000. The buyers of course walked away.
Eventually they had another offer, this time for $50,000. This is still a good offer in this market. This was turned down also. After the realtor also spoke with Dan a number of times, he said he would accept an offer of $58,000. After another month or so, they got an offer for $56,000, all cash, 30 day close. Dan said to counter at $57,000, and the buyer accepted. After he sent all of the paperwork to Dan and the bank to review, they took a while to come back with an answer. In the meantime, the Federal Government came in and shut down the bank, and another bank took over. There was a big article on the front page local newspaper about unethical practices. After this happened, it took at least another week before Dan could get back to our investor with an answer. When he got back to him, he was told that in order for the bank to accept a short sale, he would have to sign an agreement that he would pay back the balance of the loan. It is obvious that Dan and the bank do not understand the meaning of a short sale. Of course, the investor told Dan that he could not accept that. The property is off the market, and the investor continues to collect rent.
This investor had another property that was also on the market at the same time. There was an offer on this property and he submitted all of the information to the bank to consider a short sale. It took about six months before the bank came back with an answer. One week he received a notice that a foreclosure was about a month away. The next week he received a letter from the bank that they would accept a short sale. They closed two weeks later. Each bank is different. In this market, it is in the banks best interest to accept a short sale. When a bank takes back a property in foreclosure, they receive much less for it. In our first situation with Dan, it is easy to see how the banks have gotten themselves in so much hot water with poor business decisions. In our second scenario, everyone came out a winner, especially the buyer. Remember to always be an informed investor.
Pat Esposito has been involved in real estate for 28 years as an investor, trainer, and consultant. He is the author of The best Investment You Can Make, and The Informed Real Estate Investor and is the founder of www.TheInformedRealEstateInvestor.com