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FORECLOSURES & SHORT SALES
The Tsunami Is Coming!
by Gina Clifford
You can't turn on the
news, click on the internet or read the newspaper without seeing another
story about the foreclosure rate rising across the country. I have heard
people say that what is happening in the housing market will be comparable
to what happened during the Great Depression. WOW! What a statement. There
is no way to tell the future, but we can predict, we can compile data and
we can prepare. If that is the case, are you ready?
Let's begin with the
basics - shall we? Foreclosures. It all begins with foreclosures.
What is a Foreclosure?
When an individual
purchases a piece of property and borrows the money from a bank, they are
required to sign many loan documents. The new property owner will sign a
mortgage as well as a promissory note to borrow the money from the bank.
The collateral for the loan is the subject property. If the homeowner
fails to make the payments to the bank, then the lender has the right to
foreclosure on the property. In order for the lien holder to gain
ownership of a piece of property, they must first foreclosure.
Once the lien holder
gains ownership of the property, they will then sell it to payoff all
outstanding debts on the property. This is either done at the courthouse
as a Sheriff’s Sale or when the bank takes back the property as a REO
(Real Estate Owned) and has to sell it on the market.
Why does this happen?
The top three reasons
that I have seen why people fall into foreclosure are death, divorce and
loss of job. However, there are always exceptions to the rule. What we are
seeing as of recently is skewing the norm and even the average Joe is
falling into Foreclosure.
Why are there so many
foreclosures?
Remember the refinance
boom that happened a few years ago? Lenders made it easier for an
individual to be approved for a loan with stated income and no document
programs that were available. Many people were applying for ARMs
(Adjustable Rate Mortgage) in order to afford the payments and buy their
own home. There will be over $259 billion in ARMs that will come due every
year for the next five years.
In addition, Interest
Only loans are also yielding problems. As a result, most people are
over-leveraged on their properties. I have seen loans as high as 120-125%
over the property’s value. If you review the amortization schedule when
you get a loan, you will see that it takes you approximately five years of
payments just to begin paying down the principal. Before that the majority
of your payments are being applied toward the interest. If something
detrimental happens in your life (health, family and career issues) you
may no longer be able to make your payments. The scary thing today is
that most homeowners don’t even have to miss a payment to be upside down.
What are their options if they fall into foreclosure and have no equity to
bail themselves out? Due the increased number of foreclosures, banks are
now at a crossroad. They can't afford all of these defaulted loans and
need to do something to give these homeowners an opportunity to save
themselves from the foreclosure.
Foreclosure Tidal Wave?
Does that mean we will
see a tidal wave of foreclosures sweeping the land? You better believe it.
If we have a foreclosure tidal wave coming when it crashing into the
shore, next will follow a Short Sale Tsunami!
Example:
If you are an investor
and you market to people in foreclosure you may employ many different
marketing techniques to get the phone to ring. Imagine that a homeowner
sees one of your ads and calls you to buy their house. The call will go
something like this:
The homeowner says that
they owe $147,000, the house is worth $155,000 and the house needs work.
What kind of work you ask? “Well, I have six dogs, German shepherds, and I
don't take them out very often. They sort of run the house.” True Story!
Most “We buy houses”
investors say in their advertisements that they buy in “Any area, any
price, any condition”. Once they hear this call they tell the homeowner
“Good Luck with that” and hang up. No Equity leads go in the garbage can,
right?
Question: If you market
to people in foreclosure, how often do you get this type of phone call?
Answer: All the time.
The ratio of no equity
foreclosure cases are 8 out of 10 calls. So how do we profit from no
equity deals? We need to do something called a Short Sale.
What is a short sale?
A short sale scenario is
necessary when the homeowner owes close to, or more than, what the
property is worth. We work with the homeowner in negotiating with their
lender to accept less than what is owed as payment in full. Thus, wiping
the slate clean for the homeowner and getting them out of foreclosure.
This allows you, the investor, to purchase the property for under market
value.
Lenders will only
entertain a short sale when the homeowner is in default on the lien. It
does not matter if they have three liens, a tax lien, a mechanics lien,
association lien, etc. Any of those can be negotiated to accept less than
what the current balance is on the lien. It also doesn't matter which
lien is foreclosing when you attempt your short sale, only that there is a
delinquency.
How does the investor
work the short sale market?
There are many
intricacies in the “Art of the Short Sale”. First, you need to get
educated. Learn the process from A to Z. You will want to understand the
documents needed to negotiate with the bank and do your homework.
Any one of us could
figuratively sneak onto an airfield, borrow a plane and figure out how to
take off. I would hate to be in the air by myself, running out of gas and
then realize that I don't know how to land the plane. Get educated. Don't
wing it.
Gina Clifford is an
investor, public speaker, mentor and real estate broker. Unlike many
“Gurus,” Gina not only teaches classes on foreclosures and short sales but
she is actively working in the market. She can be reached at 630-883-4210
or email askthequeen@gmail.com.
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