Wednesday, May 26, 2010

What is a Real Estate Short Sale?



A “short sale” is a handy term for a situation in which a homeowner’s debt on his or her property is greater than the amount for which the property can be sold.

Here’s an example: Assume a homeowner has an unpaid loan balance of $110,000, but the property will only sell for $100,000. The unhappy lender accepts that $100,000 as full payment from you or another investor. This is obviously “short” of the full $110,000 amount, thus the name “short sale.”

Let’s be clear – lenders don’t like short sales and often will go through them only as a last resort. After all, they’re not in business to lose money! In many cases, they’ll prefer the option of foreclosure since that choice makes more financial sense.

However, there are instances in which lenders accept short sales and, if you’re “Johnny-on-the-spot,” you can make a very good profit – if you’re willing to brave a complicated process!

Why Is a Short Sale More Complicated Than a Normal Real Estate Transaction?

Simply put, it’s complicated because there are so many factors involved:

- the loan mitigation policies of the lender and third-party investors
- the financial condition of the lender and third-party investors
- financial condition of the borrower
- the property’s as-is value
- the cost to “repair” the property to put it into saleable condition and market it, etc.

On top of these factors, approval for short sale has to come from the investor who actually owns the loan. And then, if the lender is a government-sponsored institution like Fannie Mae or Freddie Mac,approval can eat up a lot of time. After all, you’re dealing with government bureaucracies!

When Will Lenders Accept a Short Sale?

There are a variety of situations in which lenders accept short sales. For example, homeowners experience a devastating illness that eats up all their financial resources. Or they may be military personnel called up to active duty for extended periods of time, and they lack the income to continue mortgage payments.

Other examples include anyone who falls into the “hardship” category—disabling, permanent injuries; financial insolvency; convictions; lack of employment due to economic conditions beyond the homeowner’s control, etc.
In these instances, lenders are willing to consider a short sale.

How Do I Find Out If A Property Qualifies for a Short Sale?

You’ll have to do some digging and gain knowledge about the lenders in your area. In order to acquire that knowledge, complete the following tasks:

Task 1: Talk to the lender and find out their loss mitigation policy. If they seldom or never do short sales, don’t bother with them. Find another lender with a better record in this area.

Task 2: Find out the number of liens recorded against the property title and the total amount of money in those liens.

Task 3: Know the borrower’s present financial condition.

Task 4: Know the type of loan that’s in default and its current status.

Task 5: Know both the property’s as-is market value and its as-repaired value.

Task 6: Be aware of the state of the local economy and the current real estate market conditions. Analyze all this information to determine if a short sale is worth pursuing.

Okay, let’s assume you’ve completed all those tasks and know the short sale is worth pursuing. What’s next?

How to Pursue a Short Sale

First, have the homeowner sign an authorization to release the loan information. Next – and this is very important! - you must have cash on hand. Why? Because all short sales are cash transactions! What’s more, you also need verifiable proof that you possess the money!

Also very important - short sales can’t be made to relatives, family members, or close friends of the homeowner. In real estate, this is called an “arm’s length transaction.” What happens if you do this and the lender discovers that you’ve done an arm’s length deal? The lender can file a lawsuit to have the sale overturned!

As you might expect, the property owners themselves can complicate the process. After all, they can’t receive any of the money from a short payoff sale. That means not much of an incentive for them to do a short sale. 

And one last negative - the debt that’s canceled by the short sale payoff of a mortgage or deed of trust is subject to federal income tax as ordinary earned income. This is not true of a bankruptcy or insolvency.

How to Start the Short Sale Process

Follow these steps (yes, there are many):

- Get in touch with the homeowner who’s in foreclosure.
- Determine the homeowner’s financial condition.
- Analyze the condition of the property.
- If both the financial and property condition are suitable, ask the homeowner for written authorization to communicate with the loan loss mitigation department of the lender.
- Get in touch with the decision-maker in the loan loss mitigation department of the lender and provide them with a copy of the written authorization.
- Contact the decision-maker to discuss the short sale and request that the decision-maker send the appropriate short-sale documents to the homeowner.
- Ask the homeowner gather all documentation to provide support for financial hardship case.
- Get repair cost estimates from a minimum of three licensed home improvement contractors.
 - Do a comparable value study by assessing the value of three similar neighborhood properties sold in the last six months.
- Return the short sale proposal to the lender’s decision-maker. It should include a signed purchase agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30%, 40% less, etc. Include a HUD 1 Settlement Statement in your proposal. You can download the statement in PDF form here.
- The lender’s decision-maker reviews your proposal and orders a BPO to determine the property’s as-is and as-repaired values.
- The decision-maker either accepts your proposal or rejects it.
- If the decision-maker feels a short sale is appropriate, they’ll make a counteroffer.
- You then accept or reject the counteroffer.
- If you accept the counteroffer, you close on the transaction within 30 days.

I hope this brief introduction to short sales gave you enough information to decide whether or not you want to pursue this type of transaction. If you have more questions, please contact me today at peg@maloney.com or 402.598.3965 and we can discuss this topic or any other area of real estate.

Thursday, May 6, 2010

Ever Wondered Which Home Improvements Give You the Best Return on Investment (ROI)? I’ve Got the Answers for You!



Below I provide you with the best home improvements to make in terms of their Return on Investment (ROI). Choose the ones that best fit your situation and your budget!

Natural Gas Furnace Replacement

The ROI on furnace replacement can reach as high as 100%. How can that be? Well, of course, it depends on how long you keep the house before you sell it. In the first year, the ROI of a new furnace may be only around 10%.

However, consider that a new furnace adds to the resale value of your home and makes your home very attractive to potential buyers. And, then, if you look at the money saved in utility bills over, say, a five-to-ten year period, well, then you’ll be hitting that ROI of 100%!

Painting
 Amazingly, a new coat of paint on the exterior of your home can give you an ROI of 90%. Dollar for dollar, it’s one of the most cost-effective home improvement projects you can undertake!

Depending on the quality of exterior paint, it can cost you anywhere from $25 to $50 a gallon. To give you an idea of the overall costs, the average 3,000-square-foot home takes about 15 gallons of paint. So, you may pay anywhere from around $375 to $1,500.

Looking at the interior, you’ll likely pay anywhere from $12.00 to $50 a gallon, again depending on the quality of the paint. Plus, of course, you have the cost of rollers, brushes, drop cloths, etc. If you do the work yourself, it’ll likely cost you around $300.00. If you hire a professional, double the cost. In either case, you’ll end up with an ROI of around 75%.

Vinyl Siding Replacement

If appropriate, siding is a great place to start your home improvement projects. It has an ROI of around 88%.
Nearly everyone loves vinyl siding for two reasons – it’s low maintenance and has great durability. Plus, of course, the shiny appearance adds the perception of increased value in the eyes of potential buyers. And you have two options for putting it on. If you have the time and talent, you can do it yourself for around $1.00 per square foot!

If you have little time and money, call a professional. Depending on your area and the size of your home, the job may cost you around $7.00 per square foot and anywhere from $3,000 to $12,000.

Replacement Windows

New windows have an ROI of 80% plus. It’s true that they are expensive, running $300 for a basic design up to $1,000 for custom designs. However, they have tremendous value in terms of both maintaining the house and increasing its value for sale.

Chosen wisely, replacement windows can really improve the look of your home from the exterior and in the interior. In addition, of course, they can really save on heating bills since old windows are great leakers of energy.

Kitchen Remodeling

Remodeling your kitchen can give you an ROI of around 80%. Now, it’s true that such a remodel can be expensive; the average cost is about $17,000. However, you must remember that the condition of the kitchen is very often the deciding “sale/no sale” factor in the minds of potential buyers!

So, seriously consider this remodeling project. Add new countertops, cabinets and appliances. If you have the time and skills, do much of the work yourself. Plus, of course, shop all the sales to get the lowest price on any appliances like stoves and refrigerators.

Roof Replacement

Replacing a roof has an ROI from around 60% to 65%. Depending on the nature of the replacement, it can cost about $100 to replace a few asphalt shingles on up to around $100 to $350 for a 10 x 10 foot square.
An overall re-roofing can cost anywhere from $6,000 to $14,000, depending on the size of the roof and the nature of the shingles (asphalt, wooden, etc.).

Now, while roof repair or replacement doesn’t have as high an ROI as some other home improvements, it’s definitely important because buyers will back quickly away from the purchase of a home that needs roof repairs. So, put this one high on your list!

Bathroom Remodeling

The ROI on a bathroom remodel ranges up to 78-80%. The average remodel costs in the $12,000 to $13,000 range. If you go “whole hog,” costs can range up past $30,000. However, you don’t have to do all the remodeling at one time, and you may be able to make some of the changes yourself.

For example, new tile or linoleum can up down for anywhere from $100 to $1,000, depending on the size of the bathroom and the materials used. New light fixtures can also be an inexpensive do-it-yourself project.

So, there you have it – a list of home improvements that will give you the best return on investment!

If you’d like to discuss the ROI on other home improvements, contact me today at peg@maloney.com or 402.598.3965, and I’ll give you all the information you need.