Dean Graziosi | Dean Graziosi Real Estate | Dean Graziosi Investment

Foreclosure is intimidating, embarrassing and stressful.  Foreclosure can be avoided by either completing a short sale, or loan modification or forbearance program.  Unfortunately banks have been burned by all these options.  43% of loan modifications have become delinquent within six months.  To complete a short sale, the lender inevitably ends up taking a loss and forbearance programs only work if the homeowner can find work.  If the employment opportunity is elsewhere, the lender is likely to takeover the house anyway.

Homeowners are frustrated.  Most homeowners want to make their payments but simply do not know where to turn.  Lenders do not really want to foreclose.  Owning and maintaining property is expensive and lenders are not geared for this process.

Recently, Sheila Bair the Chairman of the FDIC ordered 53 of the banks under the agency’s control to consider forbearance programs for unemployed homeowners.  The Department of Treasury and the Obama Administration have enacted incentive-based legislation to urge borrowers and lenders to come together before foreclosure takes place.

Lenders are obligated to pursue foreclosure when homeowners do not communicate and attempt resolutions.  Very often, the lender is willing to work with the borrower to attempt a better alternative. 

Most foreclosure actions take six to eight months.  During that time, the borrower can attempt forbearance plans, loan modifications, a sale or short sale or refinancing.  Many homes have decreased in value during the recession and loan values often exceed the fair market value.  This “under water” scenario is most common in the Sunbelt areas.

Foreclosure can sometimes be avoided if the borrower presents a strong case to the lender.  The request should including bank statements, debt balances, a statement of income, pay stubs and a letter of hardship.  Lenders are obligated to protect their investments but borrowers are sometimes surprised with the bank’s willingness to avoid foreclosure. 

RealtyTrac, an internet-based real estate data collection agency reported that August 2009 foreclosures reached 358,471, raising the four-year foreclosure total to more than 4 million homes.  In 2009, more than 1.9 million U.S. homes have entered some stage of the foreclosure process.

Debra Marsh, the executive director of the Lied Institute for Real Estate Studies at the University of Nevada Las Vegas suggested; “Whether you are an investor looking to purchase a rental property or a homeowner who is ready to retire and move someplace more affordable, the price of foreclosed properties right now is right.”

Experienced investors realize that the current climate for buyers is extremely favorable.  The inventory of Real Estate Owned properties has never been as supplied.  More than 1,000,000 homes will fall into the REO category by the end of January 2010.  Real Estate Owned provides qualified investors with serious profit potential as banks remain anxious to dispose of inventory.

As management fees, maintenance and insurance costs continue to mount, many lenders are approaching qualified investors with aggressive financing alternatives.  Qualified investors should convey a written letter of interest along with a pre-qualification letter, a balance sheet and investment history.  Better yet, locate bank employees who handle the REOs and arrange a meeting to discuss inventory and purchase procedures. 

One of the drawbacks to REO acquisitions is the amount of time these transactions can take.  However, investors can use this time to procure competitive bids for improvements, locate prospective tenants or buyers for a quick turnover.  By establishing a personal connection with the bank’s Real Estate Owned or foreclosure department, the investor can expect the relationship to expand.

While many investors envision the buy and flip option, the more likely option is buy and hold.  Analysts feel there are two to three years worth of shadow inventory that will need to sell before prices begin to climb back to 2006 levels.  At today’s prices, the wait should be worthwhile and the closing delay may well work to the buyer’s advantage.    

When the homeowner calls and has decided a short sale is the only alternative, the listing agent must move rapidly.  Time is of the essence.  The listing homeowner has agonized over this dilemma.  Either the house is headed for foreclosure or the seller has already received a Notice of Default.

Ensuring the success of a short sale is often about price.  Unfortunately for the seller, the short sale listing price is rarely reason for celebration.  After all, the short sale is predicated on financial hardship and shrinking market value.  The purpose of the short sale is to conclude a transaction that is acceptable to the lender before foreclosure becomes necessary.  The homeowner is attempting to sell the property for less than is owed and get out of the transaction with a semblance of credit and credibility.  Short sales are tough on the sellers and tough on the lender.

Pricing the short sale is about bringing five parties together in a compromise.  Shirt sale listing prices are not based upon fair market value.  The truth is that short sale prices are generally below market value.  The short sale listing price must appeal to five interested parties.

·                     The short sale bank – in explaining the listing price to the bank, the agent should use pending sales comparables.  By the time this transaction closes, those will be relevant.

·                     The buyer – short sale buyers do not expect to pay market value.  Short sale buyers are valued commodities.  They are also going to have to wait 90 days or more to close.  The price must motivate them.

·                     The buyer’s agent – short sales take longer than a conventional sale and the agents generally make less money.  The buyer’s agent will need to see this listing is a goof offer and a viable transaction.

·                     The buyer’s lender – the buyer’s lender will be using an appraiser.  Today’s lenders need appraiser that meet stringent lending requirements.  The price cannot be too low for the buyer’s lender.

·                     The seller - the seller will not be receiving any equity from this transaction.  However, the listing price must assure the seller that all obligations are satisfied and retired.

Experienced short sale agents know how to perform and how to arrive at the best price to achieve the seller’s goals.  It is a hard process but one that is saving many of today’s homeowners.