UTAH REAL ESTATE INVESTOR

In this video I walk through a brief property analysis to evaluate the potential of a property in American Fork, UT for subdivision (lot split) possibility. This property has been on the market for about 1 year because the asking price does not justify what the property can become.

This property needs 150 feet of frontage to subdivide into 2 lots. Many people have approached the neighbors about buying the missing land but the neighbors do not want to sell. Using Highest & Best Real Estate Investing techniques we uncover another option.

This video goes through the steps of the initial property analysis to determine if there is enough potential to pursue this property (and move to the next step in the evaluation process).

Below are the images of the properties used in the video. Click on each image to see a larger (more readable) picture.

The following is an excerpt from an article written by Harvey Mackay about how to negotiate. Since this list was so simple and straight forward I wanted to share it.

1. Never accept any proposal immediately, no matter how good it sounds.
2. Never negotiate with yourself. You’ll furnish the other side with ammunition they might never have gotten themselves. Don’t raise a bid or lower an offer without first getting a response.

Here are some more rules of the road:
3. Never cut a deal with someone who has to “go back and get the boss’s approval.” That gives the other side two bites of the apple to your one. They can take any deal you are willing to make and renegotiate it.
4. If you can’t say yes, it’s no. Just because a deal can be done, doesn’t mean it should be done. no one ever went broke saying “no” too often.
5. Just because it may look nonnegotiable, doesn’t mean it is. Take that beautifully printed “standard contract” you’ve just been handed. Many a smart negotiator has been able to name a term and gets away with it by making it appear to be chiseled in granite, when they will deal if their bluff is called.
6. Do your homework before you deal. Learn as much as you can about the other side. Instincts are no match for information.
7. Rehearse. Practice. Get someone to play the other side. Then switch roles. Instincts are no match for preparation.
8. Beware the late dealer. Feigning indifference or casually disregarding timetables is often just a negotiator’s way of trying to make you believe he/she doesn’t care if you make the deal or not.
9. Be nice, but if you can’t be nice, go away and let someone else do the deal. You’ll blow it.
10. A deal can always be made when both parties see their own benefit in making it.
11. A dream is a bargain no matter what you pay for it. Set the scene. Tell the tale. Generate excitement. Help the other side visualize the benefits, and they’ll sell themselves.
12. Don’t discuss your business where it can be overheard by others. Almost as many deals have gone down in elevators as elevators have gone down.
13. Watch the game films. Top players in any game, including negotiating, debrief themselves immediately after every major session. They always keep a book on themselves and the other side.
14. No one is going to show you their hole card. You have to figure out what they really want. Clue: Since the given reason is never the real reason, you can eliminate the given reason.
15. Always let the other side talk first. Their first offer could surprise you and be better than you ever expected.
– Harvey Mackay

Seller financing is extremely powerful because the buyer and the seller have control over all the terms of the transaction. That means that there are virtually unlimited applications for seller financing. However, all of the options for seller financing fall into just a 2 major categories: financing after the closing and financing before the closing.

The following 4 types of financing occur after the closing:

1. Free and Clear Financing – When a seller owns a property “free and clear” there are no liens or encumbrances on the property. In this situation the seller and the buyer are free to make any terms they want to in order to make a deal successful.

2. Equity Only Financing – This type of financing means that the seller only finances their equity in a property. The buyer is responsible for getting new financing to pay-off all of the seller’s encumbrances and liens. The seller is then free to finance the equity in the property.

3. Wrap Financing – This is also known as “subject to” or “blanket” financing. In this situation the buyer takes the property “subject to” the existing mortgage. The buyer is responsible for making mortgage payments to the seller and the seller is responsible for making mortgage payments to the original lender.

4. Combo Seller Financing – This type of financing is a combination of the financing options #2 & #3. The buyer can “wrap” the underlying mortgage and finance the seller’s equity.

The next 4 types of seller financing occur before the closing:

5. Purchase Option – Any time the buyer gives money to the seller (option payment) for the right to purchase the property at a given price (option price) and within a given timeframe (option period) the buyer has a “purchase option”. This is a form of seller financing because the seller still is responsible for the property and any payments until the buyer purchases the property (exercises their option to purchase) or the option expires.

6. Extended Closing – An extended closing is similar to a purchase option except that the extended closing is done with a Real Estate Purchase Contract (REPC). In the extended close the closing deadline is extended or put into the future significantly further than a typical real estate purchase.

7. Open-ended Closing –The open-ended close is also done with the REPC except the closing deadline is tied to a future event (such as the completion of an addition or remodel). The closing only occurs after the future event has occurred or has been completed.

8. Seller Partnerships- In this situation the seller may sell the property or may retain ownership. In either case, the seller contributes the property (and possibly some capital) as their contribution. The buyer would contribute the work and knowledge (and possibly some capital) to create or enhance the property value. The property would then be refinanced by the buyer or sold to a third party. The seller would get his equity and capital contribution plus an agreed partnership split of the additional profits on the transaction.

The great thing about these 8 types of seller financing is that every option can be used to benefit both the buyer and the seller. Using these seller financing options a seller can actually get a buyer to come in and improve their property, do all the fix-up and repair work at the buyer’s expense, and the buyer is excited about doing the work! I’ll explain how this can be in my next article…

One of the most misunderstood topics in real estate is “Seller Financing”. This is probably because the topic of seller financing is usually discussed from the perspective of the buyer. And in most cases the buyer is a beginning investor who is trying to get a “good deal” or they are starting to buy property with “no money down”. But all too frequently the deal falls apart and the stories explode about the problems of seller financing.

It is time to unfold the power of seller financing and the simple secrets and techniques to keeping the transaction a positive experience for everyone. While most people can explain the benefits of seller financing for a buyer what most people don’t understand is that seller financing is actually better for the seller than it is for the buyer. Here are several ways that the seller can benefit from offering seller financing on their property:

1. Timing – The seller has complete control over the timing of the sale when they are offering the financing. The seller can determine just how long it will be before the sale closes. The seller can determine how long they can stay in the house after the sale closes. The seller can determine exactly how long the buyer must pay on the mortgage and when they have to refinance and pay off the loan. And by offering seller financing they can get their home sold more quickly because of the appeal of seller financing to the market in general.

2. Higher Sales Price – Market value is based upon “supply and demand.” Most sellers are not offering seller financing so there is a limited supply but there is a huge demand. As a result, the price of the home in higher than the other comparable homes in the neighborhood. Also, because the traditional costs of mortgages are no longer in the equation you can collect that money too (as much as 3-5% of the value of the home) as part of the sales price.

3. Cash at Closing – There is nothing that says a seller must finance the entire purchase price of the property. The seller can require a down payment which will provide some cash at closing. (There are more advanced way to collect cash at closing which go way beyond a down payment but can still result in a “zero-down” for the buyer.)

4. Payments over Time – When the seller finances the equity in their property, those payments become a steady stream of income for the seller. This becomes a fantastic income stream for someone who may be down-sizing or who does not want their property for any reason (this is especially great on investment properties).

5. High Return on Investment – Considering the equity as an investment, the payments received from seller financing are better than one can expect from a savings account, CD or mutual fund. Even if the interest rate on the seller finance mortgage is small, the principle balance of the investment is larger than the seller could have received through a traditional sale.

6. Difficult Properties Sell Easily – Sellers who have properties that are difficult to sell can sell them with seller financing. Again, the demand for any property increases as more people are qualified to buy them.

7. Collateralization – The seller controls the terms of the mortgage and can require additional collateral to secure the loan. This additional collateral can come in many ways. Of course the seller can require a large down payment. However, some other options include additional co-signers on the loan or equity in a 2nd property. If the buyer owns another home or an investor own additional property, the seller can attach their seller finance note to the other property. This will make it more painful for the buyer to default because the seller can claim the additional property in the event of a foreclosure.

In selling a property it is the owner who has control over the entire transaction when they offer seller financing. The seller controls all the aspects of the sell including the timing, the price, the terms, their return on investment, and security and protection of their equity. Since the seller has the flexibility to craft a sell the meet all of their needs, why would you sell it any other way?

How would you like to offer seller financing but remove all personal liability for the property after the sale? How would you like to increase your income from your rental property and get rid of ALL property management? How would you like to get paid twice what your property is worth? How would you like to sell your investment property and never pay capital gains taxes? Stay tuned for some practical examples of seller financing tips and techniques that will keep you out of trouble when you sell your property.

In order to be a “real estate professional” under the law you must spend 50% or more of your time actively managing your properties AND perform 750 hours or more of your activities spent on your real estate activities. IF YOUR QUALIFY, then you can take additional passive activity losses against any type of income, including your spouses (BIG BENEFIT).

TIP: Being a licensed Real Estate Agent does NOT make you a “real estate professional” under the tax laws. This is one of the greatest myths and pieces of bad information that real estate investors get given to them that I see over and over again.

WARNING: The IRS is auditing tax returns that have selected the “real estate professional” box in order to take more of their rental losses. Thus, you must document all your activities spent managing your real estate investment properties and rentals. Keep emails, letters, a log-book of calls, etc…You as the taxpayer have the burden of proof and the IRS is making this classification a priority on audits.

This information has been provided by the tax professionals at Kingman Winslow LLC.

I have a simple strategy that I use when I want to get a short sale sold. Here is the process:

1. List the Property
2. Get an Investor Offer on the Property
3. Collect current Financials & other Short Sale Documents
4. Submit entire short sale packet to lender(s)
5. Order BPO/Appraisal and lender’s BPO/Appraisal
6. Start a “Dutch Auction” list price weekly reduction
7. Negotiate lowest acceptable net price to lender
8. Compare Highest & Best offer with lender’s approved price/value
9. Close transaction

Here is a short summary of the reasoning behind each step:

1. List the Property
The lender wants to know that we are doing everything we can to facilitate a sale. If the lender knows that it is listed and marketed on the MLS then we have the best chance of finding a qualified end buyer. They also know that the offers from a listed property represent “market value” and are more willing to negotiate a good settlement value.

2. Get an Investor Offer on the Property
Investors will always offer a low price on any property in order to get the best deal available. At this stage of the game it doesn’t matter, we just need a legitimate offer that we can submit to the lender to get the short sale process started (we are always honest and never fabricate an offer). We also want that offer to be low so that we can find the lowest acceptable value that the lender will approve.

3. Collect current Financials & other Short Sale Documents
The financial information needs to be current so it is collected when we have an offer. I have a network of investors so I know I’ll have an offer within a couple days of listing the property so I begin to collect this information immediately. The short sale documents include all the financial information to “prove” to the lender that the seller can no longer afford to keep the property and that they need to sell it. These documents also show what happened to the seller because they could afford the property when they bought it and now they can’t they afford it. All information needs to be truthful and honest.

4. Submit entire short sale packet to lender(s)
All the information is submitted in one packet to the lender. This keeps information from becoming lost and allows the process to move forward more quickly. Since most lenders are backed up with other short sales and foreclosures, the first several calls to the lender will just be checking on information and making sure that all information then lender needs has been submitted. Any missing information can quickly be resubmitted.

5. Order BPO/Appraisal and lender’s BPO/Appraisal
While almost no one does this, we order our own BPO on each property. We want to have an independent opinion of value and price. The 1st mortgage lender will almost always order their own BPO (an appraisal if the loan is over FHA limits) to establish value. With our own BPO in hand we will meet the BPO agent and show them the property and give them a copy of the BPO as a second opinion. We will point out those things which are important to the value of the property but that may not be obvious to someone not already familiar with the property. Our main objective is to get an idea of where that agent feels the value of the property will be (although they never tell us their value). We also use our BPO to send to any junior lein-holders so they are also aware of value (which makes negotiations with them go more smoothly).

6. Start a “Dutch Auction” list price weekly reduction
To get the best price available we need to have competing offers. Once the BPO has been completed by the lender we start to lower the price each week until we start to get offers on the property. If we don’t see any offers during the week we lower the price. (I like to lower the price on Thursday so that anyone looking for homes to view over the weekend will see the price change and come to see the home.)

7. Negotiate lowest acceptable net price to lender
Once all of the paperwork has been received by the lender the case/file is assigned to a negotiator who then orders the BPO/appraisal. (Note: We hold any subsequent offers until the negotiation is concluded to establish the best possible pay-off/settlement the lender will allow for the seller.) Once the BPO has been received by the lender we begin the actual negotiations. We know that the lender’s BPO value represents the price that the lender believes they can sell the property for (should they take the property back through foreclosure). We know that the lender’s bottom line is below that number because the foreclosure process is very expensive (attorney’s fees, property insurance, loan interest to Fed, selling costs, commissions, concessions, and dropping property values…not to mention the problems the lenders are having with too much bad debt on their books). Those costs generally add up to 15-20% of the property value (they can be significantly higher in upper-end homes). The lender will negotiate a value that is as high as possible but at least higher than their bottom line through the foreclosure process. Once they agree to a net value it is logged into their system.

8. Compare Highest & Best offer with lender’s approved price/value
Once we have determined the lender’s bottom line we will compare that value with our highest & best offer on the property. If the H&B offer is significantly higher than the lender’s approved bottom line then the investor will buy the property and resell it to the buyer with the H&B offer. However, if the H&B offer is not significantly higher then the lender’s bottom line then the H&B offer is submitted to the lender for approval and that buyer will close a single transaction. (Significantly higher means about 12-15% of the property value. The investor will have costs associated with 2 closings: 1% 1st closing costs, 3% money costs, 1% 2nd closing costs, 3% commission to 2nd buyer’s agent and the investor’s profit. So if the investor finds their own buyer they can reduce the sales price by 3% and still be profitable.)

9. Close transaction
Finally we close the transaction, either with or without the investor. The seller should be done with this settlement and no further negative reporting from the lender (our agreement with the lender states something to the effect of “satisfaction in full to seller”). Because the lender is writing off the “bad debt” lost in the negotiations, the seller may see a 1099 tax form which shows the lender’s loss as income for the seller. If the property was the seller’s principle residence then that “income” may be excluded from their taxes (some restrictions apply so consult your tax advisor).

Conclusion
At the end of the day this process is not 100% successful. However, it is a process that gives the seller the best chance of getting an approved short sale from their lender that is sellable in today’s market.

I have worked with many agents who are now working short sales. The process of working with the lender is no longer so mysterious and in most cases is fairly straight forward, albeit usually quite time consuming. But there is one problem that seems to plague the majority of the real estate agents currently working in this arena…the game plan!

The average agent, once they get their short sale listing, does a market analysis and determines a range for current market value. In their efforts to get the best deal for their clients and have the best chance for a short sale approval, these agents list the property at the top of the range for market value. If they can get an offer, they reason, it should be approved because it is close to market value. If they get an offer and that buyer is willing to wait 60-90 days (wondering if they will get to buy the house) and the lender’s BPO/appraisal comes back appropriately and the lender’s investor approves the deal and the supporting documentation has been properly submitted and recorded (and nothing lost or deleted) and the market hasn’t changed during the process (values haven’t dropped any more) then the deal is done.

This process works occasionally, enough so that most agents feel they are successful short sale negotiators. However, this seems to be a precarious game to be playing with your clients financial future. It seems to me that a better game plan could be employed to create more probability that your short sale will be approved.

The process I use is a little more calculated to bring a successful closing for my clients. Our first offer is ALWAYS from an investor. An investor offer is significantly lower than market value. This offer is submitted to the lender with all the supporting short sale documentation (all at the same time). An independent BPO is ordered by us for our own notes and is used when there is a junior lien-holder (usually a 2nd mortgage). We are always present when the lender’s agent does their BPO and we make sure to share our BPO with them (in case it can be of benefit to them to have a second opinion). We know the lender has a lot of costs should they choose to foreclose which usually costs about 15-20% of the value of the property. We show the lender that a short sale will net them more than a foreclosure (and it will save them all of the work, hassle, bad debt, etc.).

Since we started the negotiations at a low offer we can increase the price (net to lender) and still have a value below current market value that we can sell quickly in any market. Once the BPO has been completed by the lender we begin to lower the value (much like a Dutch Auction) until we start to get competing offers. These offers a generally better than the investor’s offer and still better than the lender’s bottom line. This means that if the investor backs out of the deal we have back-up offers on the property or if the investor consummates their purchase they have end buyers interested in purchase the “flip” with virtually no holding costs. The real triumph is that the seller gets an approved short sale price that can be sold under current market conditions and usually will create competing offers too.

Why don’t most real estate agents fail to use this method. I don’t have that answer but I suspect that there are two major reasons. 1) The agents are not trained to think like investors and do not honestly believe that the lender will accept such low offers, even if you show them that it is in the lender’s best interest to do so. And 2) the agents don’t have time or don’t have the skills to truly negotiate with the lenders; so going for the easy negotiation is their only option.

What is the harm with going for a market value offer? Nothing if the sale is consummated. The problems occur when the buyer backs out of the deal (which occurs most of the time). If an offer is submitted today at market value then a couple of problems may occur. 1) The buyer usually doesn’t stick around for the approval in 90 days. 2) The lender believes that they can get another market value offer or better and their expectation is set too high; they won’t consider lower offers. 3) In a market that is losing value, a market value offer 90 days from now is less than a market value today; a buyer who sticks around still won’t be able to get the appraisal value high enough to complete the purchase (or they buy a property that is upside down from day 1 and who will do that in today’s market?). This is a bad scenario for everyone.

My advice is to start with an investor offer. The chances for being successful are better if you start your negotiations lower and you can still sell for market value when the sale is approved in 60-90 days.

I think that just about everyone knows intuitively that you can get a great deal by purchasing a short sale property. But just how much of a good deal can you really expect to get after all of the negotiating, lost paperwork, apparently lack of progress, angry customer service people, extra time, etc. And where do you start. Let’s consider the purchase price.

How much do you offer on a short sale purchase? How much of a discount is the lender actually willing to take? And what offer will the seller accept in the first place?

There are a few numbers that you need to be aware of when purchasing a short sale. The first and most important number is current market value! When considering what the current market value is today we do not take into consideration what the property sold for last or what the current owner owes on the property. We need to look at the value from the bank’s perspective…if the property is listed as an REO (bank owned) property, what price would most likely cause it to sell in 60 days? The answer to that question in current market value.

Why does this method work to determine value? Because the bank has to answer one simple question, “if we take the property back through foreclosure, how much can we realistically sell the property for?” The bank will determine this value with a BPO (Broker Price Opinion).

When we consider the market comparables we only look at property that has sold within the past 60 days; anything longer than this is old data. We also need to take into consideration the other active listings (the competition) in the area and how that will affect the sales price so that the property could sell in 60 days. If the property has been on the market for more than 30 days without an offer then the list price is too high for the current market.

Once you can figure out current market value your ready to begin to calculate an offer price. Once again we must look at the property from the perspective of the lender, “how much can we realistically expect to NET if we take this property back at foreclosure?” The lender will incur quite a few expenses through the foreclosure process (such as legal fees, holding costs, insurance fees, repair expenses, closing costs, realtor fees, etc.). The lenders are doing so many foreclosures now that they know these expenses very well for every area of the country. If you know what these expenses are you can figure out the lender’s bottom line. Your offer just has to be higher than their bottom line and they will accept your offer!

Experience has shown that the foreclosure costs for the lender are between 15-20% of market value. With this in mind let me share a quick example:

I have a property that was purchased for $300,000 about 18 months ago. Today the CMA (Comparative Market Analysis or Realtor Price) value of the home is about $250,000. Considering the market factors a current market value of $220,000 is more realistic. So the investor offer price on this property would start be between $176,000-187,000.

Now just because the lenders will accept this lower value doesn’t mean they won’t kick and scream about wanting more money. There is more to a short sale than just price. However, if done correctly most lenders will accept these lower values because they actually net more money through the short sale than they will net if they go through the entire foreclosure process. And since the lender will get less than they are owed they will require that the owner receive nothing, so any offer to the seller should be acceptable as long as the investor can perform.