WIAcademy EducateBlog

A few years ago, few people had ever heard of a short sale. Nowadays, short sales are common real estate lingo. The total number of short-sale transactions has skyrocketed in the past couple of years. The news media throws out all sorts of statistics. For example, one in five real estate transactions now involves a short sale, and in some areas, up to 50 percent of the real estate transactions are short sales. Who knows what the true numbers are but one can say without hesitation that in most parts of the country there are a lot of short sales going on!

In today’s real estate climate, if investors do not take advantage of the opportunity offered by short sales, they are really missing the boat. Investors need to be trained experts at negotiating short-sale deals. Our company offers both online and live courses dealing with foreclosures and short sales. These courses, coupled with a good real estate coach, will prepare investors to compete.

To start, let’s define a short sale. A short sale occurs when a property (usually in foreclosure) is being sold by the owner and the lender accepts a payoff amount that is less than what is actually owed on the property mortgage. In other words, the lender is willing to discount the mortgage payoff rather than go through the complete process of foreclosing on the property.

Why would a lender take a discount on the mortgage note? Why wouldn’t they just foreclose and sell the property? The truth of the matter is that the bank probably would foreclose if the property had substantial value above the mortgage balance. If a property has a current market value substantially above the mortgage balance, the bank can reasonably expect to foreclose on the property, take title, and resell the property at a high enough price to recover their foreclosure expenses and the outstanding mortgage balance. But do most properties in foreclosure today have current market values higher than their outstanding mortgage balances? Most certainly not!

When highly mortgaged properties go into foreclosure, the last thing the banks want to do is actually complete the foreclosure process, take title to the property, and try to resell. The banks stand to lose a lot of money. The proceeds from the property sale usually do not cover the outstanding loan balance, let alone the expensive foreclosure costs and fees. Loans in foreclosure, classified as nonperforming loans, can’t be leveraged into more borrowing power for the bank. The banks are not only losing money on the non-performing loan, they are losing money on the lost opportunities of making additional new loans.

By agreeing to a short sale, the bank may be losing some money, but not as much as if they completed the foreclosure process. It is a buyer’s market, and the banks know that when they do sell the property, it will have to be at a substantial discount. Most wise banks and lenders will choose to approve a short sale.

However, this does not mean short sales are easy! On the contrary, short sales can be very difficult to complete, and banks seem to take forever to make decisions. Successful short sales require cooperation between the stressed-out property owner, the lender, the property buyer (quite often a real estate investor), and, many times, a real estate agent who has the property listed. And if the real estate investor’s goal is to quickly resell the property, the investor’s end buyer needs to be included in this ever-expanding group.

The person facilitating the short sale has to first educate the property owner about how the short sale works and let him or her know what documents will be required to be submitted to the bank. If the property owner agrees to fully cooperate and try for a short sale, he or she then provides a letter of authorization allowing contact with his or her lender about his or her loan. The person coordinating the short sale then proceeds to contact the bank who owns the mortgage note and requests a short-sale package.

But who at the bank (or lender) needs to be contacted in order to get the short-sale package? It certainly isn’t the teller at the drive-up window, or any of the local loan officers, or even the president of the local branch. Sometimes just finding the right person to speak with at the bank can be challenging.

Banks have a special department, usually called the loss mitigation department, that handles loans that are in default. When a loan goes into default and the bank decides to start the foreclosure process, someone in this department will be assigned the loan. Note that individuals in the loss mitigation department can have 50 to a 100 or more defaulted loan files that they are working on at any given time. The person coordinating the short sale for the homeowner needs to locate the specific person in the loss mitigation department who has been assigned the homeowner’s loan file. This person (the loss mitigator) will be the one who receives the short-sale package and coordinates the bank’s review process that results in either an approval or disapproval of the short sale.

The short-sale package provided by the bank gives the specific requirements and instructions for submitting the documents the bank will need to review in order to approve (or reject) the short sale. Once the short-sale coordinator knows what documents the bank requires, he/she works with the homeowner. He/she assembles the package and the completed package is then submitted to the bank or lender. Note: it is very important to make sure the package really is complete and includes every document and record the bank has asked for. The price offered for the property will be based on what the investor is willing to pay and the bank will have to decide if they are willing to discount the mortgage note to that amount and accept the offer, willing to counter offer with a higher price, or reject the offer all together.

The loss mitigator usually has the authority to approve a short sale if the offer price is within a certain percentage of the value of the property. For example, if the property were valued at $100,000, the loss mitigator may have the authorization to approve offers that are within 18 percent of the $100,000 value. An offer of $82,000 or above would be automatically approved (assuming all of the other documentation is in order and shows the homeowner(s) really has a hardship and can no longer make the mortgage payments).

But if the offer were lower than the $82,000, the bank would probably counter the offer with a higher price closer to the $82,000. So, no matter how good a short-sale coordinator (usually the real estate investor) is at putting together a great looking, complete, and neat short-sale package, no matter how good they are at educating the homeowner, no matter how good they are at talking and negotiating with the loss mitigator, if their offer is not within the required percentage of the property value, the short sale will most likely not be approved.

How does the bank determine the value of the property? The bank’s loss mitigation department is probably not very close to the foreclosure property and is most likely located in a completely different state, clear across the country. The loss mitigator (or someone from his/her office) can’t just take a long lunch and go out and look at the property to determine its value. What do they do? To determine the property value, the bank has to rely on what is called a BPO (broker’s price opinion).

What is a Broker’s Price Opinion (BPO)?

A BPO is a tool used by lenders and mortgage companies to determine the value of a property in situations in which they don’t want the expense and delay of an appraisal. The BPO is most commonly performed when a property is in default and the bank or lender wants to know what the value would be if they had to take the property back and resell it as an REO (real estate owned) in the current real estate market. Thus, lenders are looking for a quick-sale value, a price the home would most likely sell at in 90 days or less.

BPOs are typically completed at the request of the REO department or the loss mitigation department. Real estate agents who work in the area of the subject property are requested to perform the BPOs, since they are more familiar with their local real estate market and are best equipped to determine a quick-sale value.

What is a BPO report?

The BPO report is a combination of information, not just a value of the property. Although it is not as detailed as a full appraisal, it still contains enough information for the bank to get an idea of the property condition, how saleable it is, and its quick-sale value. Many banks or lenders requesting a BPO will have their own forms they want filled out for presentation of the information.

What are the two main types of BPOs?

There are two major categories of BPO’s, the drive-by BPO and the interior BPO. The reason for the BPO will determine which type of BPO is ordered by the loss mitigation or REO department. If the reason for the BPO is a short-sale offer, most likely the loss mitigation department will order an interior BPO, to better establish the value of the property.

Basic Information Required in a Drive-By BPO:

In general, a lender requesting a drive-by BPO will want, at a minimum, information on:

• Property location
• Type of neighborhood
• Type of zoning (SFH, multiple units, etc.)
• Conformity to zoning and neighborhood
• Property age (when built and age of any additions)
• Property type and style
• Condition of all exterior features (roof, siding, foundation, etc.)
• Occupation status of the property
• Estimated square footage of the property
• Estimated room count
• Estimated lot size
• Type of parking (garage, carport, RV parking, etc.)
• Minimum of three photos: one of the front of the property, one photo that verifies the address, and one street scene (and perhaps one of the side or back of the property)
• Three currently listed comparable properties (with all detailed information)
• Three sold comparables (within the last three months). The most recent sales are the best, especially in a declining real estate market)
• Quick-sale value of the property
• Broker or agent information

As you can see, even a drive-by BPO requires a lot of work.

Basic Information Required in an Interior BPO:

An interior BPO generally requires all of the information included with the drive-by BPO and the following additional information:

• Detailed square-footage measurements (of the home and property)
• Individual room measurements
• Exact room count (number of bedrooms, baths, etc.)
• Interior features (fireplace(s), special treatments such as decorative molding, custom kitchens, hardwood floors, etc.)
• Condition of the interior
• Specific interior damage, including repair estimates
• Estimate of costs for removing trash
• Estimates for cleaning of the property
• Detailed pictures of the interior and its condition
• Specific pictures of areas needing repairs
• More exterior pictures showing condition of the yard and any out buildings
• Comments on how to secure the property if it is vacant
• Comments on need to board up the property if it has broken doors and windows
• Other information as required by a specific lender

Banks and lenders use these BPOs to establish the value of the property and then use that information to evaluate the short-sale offer price. If the BPO comes in too high, it will kill the short sale.

Investors working short sales need to be involved in the BPO process. They need to do their own BPO and make sure the comparable properties being used truly are good comps and reflect the condition of the subject property.

Posted 05:16 PM | Permalink | Comments (0)

According to various studies, somewhere between 40 and 80 percent of American adults make New Year’s resolutions. Some resolve to eat healthier, exercise more, make more money, spend more time with family, do more to help others, find a better job, quit smoking or another bad habit, find “the one,” and go back to school.

Despite all the best intentions, few people achieve their lofty goals. In fact, some studies suggest that fewer than 30 percent of New Year’s resolutions are kept! Most goal setting experts believe this is due to ignorance concerning how to set goals properly. So what can you do to minimize your chances of failure and maximize your chances of success to achieve your resolutions for 2010?

Here are some ideas:
1. Don’t set goals on the spur of the moment. Spend time reflecting on the past year’s mistakes and missed opportunities, as well as the life you would like to create for yourself in the coming year. Don’t be impulsive. If you see someone playing the saxophone in a park on December 29 and decide to make learning to play the sax one of your resolutions, you probably will not make it too far.

2. Make a list of your goals and think them through, weighing their importance. Examine your reasons for wanting to achieve the things on your list. If it is something that is not important to you, cross it off the list.

3. After making the list, narrow it down. Choose three or four important goals to focus on and prioritize. Don’t overwhelm yourself by setting more goals than you can realistically accomplish.

4. Set goals that challenge you, but are easily attainable with a good amount of hard work and dedication. If you must set a huge goal for yourself, break the resolution into mini-resolutions and tackle those one at a time. Be realistic about the obstacles you will encounter as well. Envision the hurdles you will have to face and overcome, and form an action plan for how you will respond to those problems as they arise.

5. Be specific. For example, rather than setting a goal to lose 20 pounds, write down that you will lose 20 pounds over the course of six months at the rate of one pound a week by eating three healthy meals and two healthy snacks a day, eliminating sodas and fast food, and taking an hour-long speed walk before dinner five days a week.

6. Set measurable goals. For example, don’t say that you are going to work on spending more quality time with your children. Instead, describe how you will spend the time. Some examples: I will read a short bedtime story to my children every night; one night a week will be family movie night; I will spend at least three hours playing with my children outside every weekend; and one Saturday a month I will take my children on a fun family outing, such as a trip to the museum, zoo, or a picnic at the park.

7. Ask for help. Tell supportive members of your family and friends about your goals, and ask them to help you by offering you encouragement, advice, or assistance in meeting your objectives.

8. Be positive. Believe in your ability to accomplish great things! Always exude optimism and confidence when you are talking about your resolutions. Even if you have your doubts, fake it ‘til you make it—psych yourself up to believe that you will absolutely accomplish your goals this year.

9. Set deadlines for goal progress and completion. Evaluate your progress at regular intervals. When you approach things in this manner, you can recognize and identify the things that are not working and come up with a Plan B while it is still early in the year. Also, put yourself on a deadline to accomplish certain things. Be sure to reward yourself for meeting your goals. For example, if your goal was to cut down your cigarette smoking a little bit at a time until you quit, come up with a day of the week in which you will reduce the cigarettes you are allowed to smoke. Every week that you successfully cut back, spend the money you have saved on a special treat, such as a movie rental or a magazine that you enjoy.'

10. Be resilient. If you fall off every now and then, do not become so discouraged that you just give up all together. Try to look at every setback and failure as an opportunity for you to learn something constructive. Analyze the situation and form a new plan if necessary, but get back on the horse and try again! If all else fails, grit your teeth and tough it out! Remember, the experts say that it takes 21 days of faithfully putting into practice and living a new behavior before it becomes habit, and six months of doing so before it becomes so ingrained into your behavior that it becomes almost effortless. So if you find yourself discouraged and feel as if you just can’t go on, commit to doing it for just 21 more days, come hell or high water, and stick to it! If you are feeling particularly ambitious, circle July 1 on your calendar and commit to yourself that you will absolutely not abandon your pursuit of realizing your goals prior to that date. Remember this: a little bit of hard work and determination never killed anybody. Go the distance; you will be glad you did.

Posted 01:41 PM | Permalink | Comments (0)

Owning rental real estate can be very rewarding, but it can also be very frustrating, especially if you decide to manage your own properties. Rental real estate is really the perfect investment…that is, until you put tenants into the equation. Tenants – you may love them or you may hate them, but you can’t do without them. There is simply no way around it – you must learn how to effectively deal with tenants and become a super landlord.

Before you have to deal with tenants, you must first purchase rental property. The first, and most important thing you need to do when getting involved in rental real estate is to buy right. If you don’t buy right, then you may be doomed to failure no matter how good a landlord you might be.

Owning rental real estate can be very rewarding, but it can also be very frustrating, especially if you decide to manage your own properties. Rental real estate is really the perfect investment…that is, until you put tenants into the equation. Tenants – you may love them or you may hate them, but you can’t do without them. There is simply no way around it – you must learn how to effectively deal with tenants and become a super landlord.

Before you have to deal with tenants, you must first purchase rental property. The first, and most important thing you need to do when getting involved in rental real estate is to buy right. If you don’t buy right, then you may be doomed to failure no matter how good a landlord you might be.

What does it mean to buy right? Buying right requires you to be extremely selective about the properties you buy that you are going to keep as long-term rental properties. In his book, 7 Habits of Highly Effective People, Stephen Covey argues that successful people “always begin with the end in mind.” This is critical in the real estate investing business. You need to know what you are going to do with a property before you buy it. This is really quite simple if you keep this one thought in mind: If you are buying a property to keep as a rental, buy a property that will be easy to rent and easy to manage. Do your homework before you buy:

• Check the crime statistics in the area; avoid high-crime areas
• Find out the ratio of rental properties to owner-occupied properties
• Find out what the current vacancy rate is for rental properties similar to the one you are considering; a high vacancy rate means you will have a harder time finding a tenant and may have to cut the rent to attract new tenants
• Find out what the current unemployment rate is in the city
• Determine the proximity to schools, public transit systems, and shopping
• Know what you can charge for rent based on what similar properties are renting for, not what you are told by the seller or their agent

Once you have identified a property that will be easy to rent, you need to negotiate a purchase price that will provide you with positive cash flow. This is very important and easy to do. You simply take the monthly rent you can reasonably get from the property and subtract all of the monthly expenses (property taxes, insurance, utilities, and maintenance). Be sure to include a proper vacancy factor, a management fee (even if you plan to manage the property yourself), a maintenance fund fee (for future repairs), and the positive cash flow you desire to get from the property. The net rent you have left (after deducting all expenses and your desired positive cash flow) is the amount that you will have available to pay the principal and interest on a mortgage payment.

You then need to calculate in current interest rates and terms. Use a mortgage calculator to determine the dollar amount you can borrow that results in the payment amount available to service the loan. This is the amount you can afford to pay for the property in order to get the desired positive cash flow.

Remember, if the property needs repairs before it can be rented, the amount of those repairs needs to be subtracted from the purchase price that was determined by the cash-flow analysis formula described above.

If you buy the property right and have positive cash flow, you can more easily tolerate the problems you might face due to the occasional bad tenant. That positive cash flow every month will bolster your attitude when dealing with problems. However, if you saddle yourself with a negative cash-flow property, your problems will seem 10 times worse than they really are. Buy right or don’t buy at all.

Assuming you have purchased a good rental property, one that will produce a decent positive cash flow, the next step is to find tenants. If you purchased wisely, then you also set some funds aside to cover mortgage payments and expenses during the time it takes to find a new tenant. Don’t feel pressured to rent to the first person that comes along just to get a tenant in the property. You need to choose your tenants wisely. If that takes a little time, it will be well worth the extra effort. Trust me on this one: it is far better to have no tenant than to have a bad tenant!

Admittedly, it is hard to completely relax until you get the property rented, so getting it rented as soon as possible is something to strive for. Keep in mind, though, that a high percentage of tenant problems can be eliminated in the screening process. So from now on your goal should be not to just get the property rented, but to get it rented to a properly qualified tenant. And once you get that qualified tenant, you need to do everything you can to keep them as a tenant and take steps to make them even better tenants!

Screening and Qualifying Tenants
As a landlord, you must screen your tenants. If you don’t, you are just asking for trouble. Some landlords like to trust their gut feeling. You may luck out, but you might also get taken to the cleaners. Why take the chance when it is relatively easy to screen your prospective tenants properly? Here are eight steps you can take to help you with the tenant-screening process:

• Step 1 – In 1968, the Fair Housing Act was enacted. This law prohibits landlords from discriminating against applicants on the basis of race, color, national origin, religion, sex, family status, and disability. Get to know the details of this law. Fair housing – it’s not an option, it’s the law! Also become familiar with the laws in your specific state that deal with the relationships between tenants and landlords. Know the laws pertaining to tenant deposits, leases, month-to-month rentals, and evictions. The more you know, the easier it will be for you to stay out of trouble. A lot of professional tenants know the laws inside and out and, if you don’t, you can find yourself at a great disadvantage. Also, get a good attorney on your team who is a specialist in tenant-landlord law. If you ever have a question on any matter of law, consult your attorney immediately. This is not a time to guess at what is right or to use common sense; many times the law does not follow common sense, but it is still the law.

Hints for staying out of trouble:

1. Give all applicants the same information about your property, such as move-in costs or when the property will be available for occupancy.
2. Know the HUD guidelines for the number of occupants allowed in a certain-sized unit. Don’t tell applicants that the number of people in their family exceeds the limit for your rental if their family size is within the guidelines.
3. Process all applications. If you have found that seniors make good renters, for example, and only process applications from seniors, you could be in violation of the Fair Housing Act.
4. If you don’t want to rent to a particular person, don’t ever tell them that the property has been rented, if in fact it has not been.
5. Do not ask anyone about their race, age, country they are from, religious preference, sex, marital status, or disabilities.
6. Apply the same eligibility requirement and income guidelines to all applicants equally.
7. Do not say, “I don’t think you would be happy here,” just because you don’t want to rent to them.
8. You can screen people based on things such as income. Know the laws in your state so you can stay out of trouble.

• Step 2 – The first contact with a prospective tenant is usually on the phone. Start the qualifying process during your first conversation. Advise prospective tenants of the rent, deposit, and other facts about the property. Let them know if you allow pets and, if so, how much the pet deposit will be. Inform them what type of pets you allow (i.e., dogs, fish tanks, reptiles, birds, or cats) and the occupancy limit for your rental (make sure you are using the HUD guidelines). Tell them your fee for running the credit and background check. If you take just a few minutes telling people your guidelines, you will eliminate a lot of potential applicants, thus saving you a lot of time further screening a tenant who doesn’t meet your basic requirements.

• Step 3 – For those applicants that seem to qualify, fill out a prospect card with basic information: name, phone, reason for moving, number of people, number of children and ages, desired occupancy date, any pets, smoking, and present and past landlord references. If you experience any difficulties finding out this basic information, then they will probably not qualify for your rental.

• Step 4 – If the prospective tenant(s) qualifies based on your first contact, set up a time to meet them at the property and continue the qualification process. Note their appearance, which is an indication of how they will treat the property. Are they neat and clean? Take a look at their car. It doesn’t have to be a new car, but its condition and interior cleanliness is another indication of how they will treat your rental property. Their attitude and manners will indicate if they might be difficult to deal with in the future. Are they too critical of the property? Pointing out legitimate concerns is okay, but nitpicking too many things is an indication they may be problem tenants. Take time to tell them what your expectations are for your tenants and all of the critical items that will be in the lease, items such as yard-care responsibility, rent due dates, late fees, pet policy, and a guest-occupancy policy. If they have any concerns, it’s better to get them resolved now, before wasting time on someone to whom you won’t want to rent.

Step 5 – If you have gotten this far with a potential tenant, now is the time to start the application process. Start with a good rental application, one that collects all the information you will need to run a credit check and background search. The application should contain the legal verbiage that gives you permission to run a credit and background check and a place for the applicant(s) to sign. Have each individual adult fill out and sign an application. In the case of married couples, the application should have spots for both spouses’ data. Have them both sign the application. Let the applicant(s) know that they must fill out the application completely and that their application will be considered along with others, and that you will notify them once a decision is made. The application should spell out the screening fee you will charge for running the credit and background check. Check with your state to determine if there are any restrictions on screening fees. Collect the screening fee and run the credit and background checks. There are many companies that will run the checks for you. You can get easy-to-read credit reports, as well as criminal, eviction, sex-offender, and suspected-terrorist reports performed instantly and they are accessible 24 hours per day, seven days per week. An Internet search will give you plenty of companies who provide this service. Here are a few from a quick Internet search:

www.tenantscreeningblog.com
www.mrlandlord.com
www.landlord411.com
www.creditchecklandlord.com
www.landlord2landlord.com
www.accuratecredit.com
(Please note, we have not used these companies and are not recommending them. This list only provides a starting point for your research.)

Also, be sure to check with your local landlord association. They may give you the best price on running credit reports and background checks.

• Step 6 – Once you have chosen a qualified tenant, call them, congratulate them, and let them know that their application has been approved. Set a time and place for the lease signing. Let them know how much money they will need to bring, preferably in money-order or cash form, for the rent and security deposit (and any other deposits, such as pet deposits and mother-in-law deposits). If you accept a check, let them know that possession will be given after the check clears the bank. Many landlords require a credit card to pay rent, with an authorization for a monthly rent charge. This eliminates a lot of potential rent chasing each month and a lot of tenants like the fact that they never have to worry about late fees. Setting up a merchant account so you can accept credit card payments is fairly easy to do in today’s business world.

• Step 7 – The lease signing is still part of the qualification process. If the prospective tenant doesn’t agree to all the terms of the lease, you shouldn’t rent to them. Start with a good-quality lease that has all of the provisions you want to protect you and your property. You should have mentioned the most important items in the lease when you were showing the property, so there should be no surprises. It is critical to read the entire lease to the prospective tenant(s) and highlight on their copy the critical items. Have them initial every page, indicating that they have read and understand the lease and agree to all the provisions. Have them sign and date the lease, your copy and theirs, and sign the spot indicating that they have received a copy with all signatures, yours and theirs. If they argue with any of the provisions (other than minor items) and won’t sign, then politely thank them for their time and call your next applicant who qualified. Assuming all goes well, collect the money and give them the keys (unless they use a check that you want to clear before giving them possession). Remember, once they have moved in, if the funds don’t clear, you have to use legal processes to get them out.

• Step 8 – After a couple of days, send them a welcome letter telling them how excited you are to have them in your property. Thank them for their willingness to take care of the property and take pride in keeping it a great place to live. Have high expectations of your tenants and most will live up to those expectations.

There is no absolute right way to screen a tenant, but a good screening process will help you become a super landlord. So develop a screening system that works for you and use it on every new tenant. Never skip this step! You do not want to deal with any tenants from hell!

Posted 01:50 PM | Permalink | Comments (0)