There are posts on active rain dealing with the issue of working with Real Estate Investors on properties listed as short sale. While there is a lot of bad publicity, and it is warranted, there are also investors who are legitimate.
This post is to explain how a good investor gets involved in a short sale and can help the seller and the agent with the short sale.
The attempt to sell short sales directly from default sellers to end-user buyers has failed miserably. But please don’t blame the real estate agents. It’s not their fault. Selling a short sale directly from default seller to end user buyer has largely failed in the hands of real estate agents because a house that requires a short sale is not a retail ready product that an agent can sell.
Assume that the agent has all the knowledge and expertise necessary to successfully negotiate the short sale. The inefficiencies and complexities of short sales imposed by lenders preclude even the most talented agents from successfully facilitating transactions from a default seller directly to a retail end-user buyer.
Recent reports state that the number of short sales actually approved by banks represent less than 1% of all homes at risk of foreclosure. Data from the Office of the Comptroller of Currency shows that only 40,000 short sales were completed in the first half of 2009, the latest period available. Further, only an estimated 8 to 12% of all homeowners who request short sales accomplish a completed sale.
So if Short Sale are so good for banks, sellers, and the economy, and so many real estate agents are certified default specialists, and so many short sales have been attempted, why are so few completed successfully.
Real estate agents (even if well trained) are generally doomed to fail with short sales because the complexities of navigating a successful short sale are beyond the acceptable tolerance levels of their retail buyers.
Short Selling lenders (even when a property is listed by a skilled and experienced real estate agent) do not meet the expectations of the retail end-user buyers market. The reasonable expectations that a retail buyer has of a seller are:
* Getting a response to an offer within a reasonable time frame of a couple of days
* Being able to agree to a closing date 30 to 45 days after contract
* Being willing to undertake repairs and respond to or renegotiate after inspections * Bring a listing agent and a selling agent their full commissions
* Delivering clear and marketable title and clearing up all liens and encumbrances, and * Delivering the premises in broom-clean, move-in condition.
This is what a retail buyer expects and yet these are the very things that banks do not or cannot do in the short sale approval process. Until such time as lenders and sellers can meet the expectations of the retail market, retail end-users will continue to pass on short sale opportunities.
The short sale approval process is so lengthy, frustrating and complicated that the retail buyer market largely ignores any property listed as “Short Sale Requires Bank Approval” (ask any active buyer’s agent). Here’s what actually is happening on the street in today’s market. A good buyer who can get a mortgage (a very special person in today’s mortgage market) is steered away from any property listed “Short Sale Requires Bank Approval” because their buyer’s agent knows that it will be several months before she has any chance of seeing a commission check.
Even if you take the real estate commission motivation out of the mix, the normal retail homebuyer is not interested in sitting around and waiting even 2 or 3 months to get approval on a contract. The retail buyer has a shelf life of no more than 45 days between the time they are “ready to buy” and the time they expect to close.
The sentiment was recently expressed to me by a prominent buyer’s agent:
“I try not to mess with Short Sales. I tried it twice and here’s what happened: I had good buyers who liked the houses, but it took months for the bank to respond and when they did they kept asking for more money. My client agreed, and then we had a problem with the second mortgages…it went on and on and finally, my clients gave up and went and found another house where they didn’t have to mess with the short sale. Since then, I just don’t want to mess with short sales.”
With a year and a half of short sale experience under it’s belt, the retail end-user market knows that a property that is listed “Short Sale - Requires Bank Approval” is a long and frustrating journey away from ever being a property they could actually buy. Therefore, that property will sit on the market, lonely, rotting away while its value erodes.
Waiting for a retail offer with a product that is not retail ready is a recipe for failure. The agent drops the price, drops the price, drops the price until the value of that house is destroyed – hurting home values and damaging the neighborhood. Real estate agents are transaction facilitators. They may be brilliant in their knowledge of contracts, law, and markets. However, without a buyer – there is little value even the most competent real estate agent can bring. And most retail buyers do not have the patience to purchase a property listed “Short Sale - Bank Approval Required”. Therefore, short sales are usually not successful when attempting to sell directly from a default seller to a retail end user buyer.
The Answer: “Short Sale Approved” is Ready for Retail
Retail buyers, however, will flock like starved vultures to any listing that appears to be a real opportunity for a real discount. Every buyer wants “their piece of the foreclosure market” and retail buyers too want to feel as if they are getting a great deal. While retail buyers generally will not look at a property listed “Short Sale - Bank Approval Required”, simply by changing that listing to “Short Sale Approved - Ready to Close – Bring All Offers” will open the floodgates of offers on that listing and produce multiple buyers each vying for their piece of the foreclosure crisis opportunity.
However, an agent cannot simply “switch” the notes in the computer unless they are true statements. The listing notes cannot simply be switched until someone has gone through the approval process AND fixed everything else necessary to deliver clean and marketable title. A property is not retail ready until. . . it is actually ready for retail.
Here is where the real estate investor, the speculator, the much maligned “flipper” is actually the hero who provides the missing solution to the problem of the market, the real estate agent, and even the lender.
For real estate agents who understand the value they can bring to their clients by working with rather than against real estate investors, there is great opportunity.
The Solution: The Real Estate Investor
Short sales are being done successfully, legally and with full disclosure to all parties all over the country by sophisticated real estate agents and investors working together. They recognize that the best buyer for a default seller who has listed the property with a real estate agent is a wholesale real estate investor skilled at navigating the complexities of the short sale process and who has the patience to bridge the gap between short sale reality and retail expectations.
Listing agents should recognize that a wholesale real estate investor can do what the retail market cannot and will not do. The wholesale real estate investor is prepared to:
* wait 2, 4, 6 or however many months are necessary to go through the process because he is not moving into the property;
*address subordinate liens,
* address homeowner association bills, water bills, back taxes, mechanics liens
* undertake any other non-physical repairs that must be done in order to get the house ready for the retail market, and
* if there are physical repairs, the investor can do those as well.
When the bank finally gets around to approving the short sale, the investor can be ready to close quickly. After obtaining bank approval and fixing any other non-physical repairs, the property can then be advertised to the retail market “Short Sale Approved - Ready to Close” and sold at its best retail price.
Maintain Higher Property Values
Many real estate agents will express a concern about accepting a lower investor offer for fear of hurting property values in the neighborhood. Their fear is misplaced. To the contrary, working with a real estate investor actually helps protect property values and keep them higher than if the real estate agent went directly to the retail market and tried to sell to a retail end-user.
Here’s what happens when a real estate agent does not work with a real estate investor and tries to sell directly to a retail end user. The “potential short sale” listing that cannot meet the expectations of the retail market scares away the “good buyers” – people with loans who can close. The listing sits on the market and the agents starts “chasing the market down” – lowing the price, lowering the price until it attracts a buyer in a lower tier price range. Each time the agent lowers the price in the listing service, the value of that house drops because it will not sell for more than what it was listing for.
The price having been dropped, buyers from a lower price range are attracted. Eventually, the price gets low enough that a retail end user makes an offer. The agent submits to the lender. Three months later even if the short sale offer is accepted by the bank, the retail buyer has given up in frustration and moved on. The agent now puts the house on the market as “short sale approved ready to close” and gets an offer quickly at the low short sale approved price.
Assuming everything else works out (which is a big assumption) the house closes at the low price. Housing values in that community now have a new retail comparable value at the low short sale amount. Home values are hurt by the agent’s short sale strategy.
Now let’s take it through with the investor involved. The short sale is approved at a low price for the investor, but unlike a retail end-user buyer, the investor immediately turns around and sells it at a higher price. The house can attract a higher price now because it is listed “short sale approved ready to close”. Buyers are eager to get their “piece of the foreclosure market” and come out of the woodwork to buy the house.
A new comparable value is set for the neighborhood which may be considerably higher than the comparable that would be set without the investor.
The Legitimacy of the Flip Profit
The difference between what the lender could get from the wholesale market and what the investor can command after restoring the property to the retail market is a well earned profit spread to the investor whose efforts enabled the listing to change from “Short Sale - Bank Approval Required” to “Short Sale Approved – Bring All Offers” because that change in the listing itself changes the demand and interest in the property in the eyes of the market.
Sophisticated listing agents and sellers recognize the value brought by the investor in undertaking “non-physical repairs”. A house may be unattractive to the marketplace because the need for physical repairs - an outdated kitchen, faulty plumbing, or old carpeting for example.
A house may also be unattractive to the retail marketplace because of the need for non-physical repairs as well. The inability of a seller to deliver clear and marketable title absent extensive time and effort to procure the lender’s short sale approval is a non-physical blemish that must be repaired before the property is ready to command the pricing of the retail market.
The party who undertakes and completes these “non-physical repairs” creates value the same way a wholesaler who updates a kitchen, fixes pipes or replaces carpeting also creates value.
It is the same value created by the middleman who delivers vegetables from a farm to a grocery store or a car dealer who earns a spread after buying a car wholesale from a trade-in and selling it later to a retail buyer.
By selling to a real estate investor, the comparable values for property in a market are improved. Even when the wholesale investor purchases the property at a steep off-retail price, the sole reason for the investor’s involvement is to flip the property quickly for a profit. By selling quickly for a higher retail price, property values are quickly returned to the retail market and pricing and the comparable sales values set by the retail sale are immediately returned to the higher retail values.
This ultimately serves the neighborhood, community and housing market far better than had the property taken a long slow journey towards foreclosure and ended up as a vacant REO listing.
Profit spreads between wholesale purchases and retail sales are not fraudulent nor are they unearned when the wholesaler is responsible for bridging the gap between the wholesale and retail markets.
"Property flips are not inherently illegal and not all transactions involving a rapid purchase and resale are improper. Legitimate property flips are acceptable transactions . . . . Some indications of property flip transactions that may be legitimate include . . . sales of properties that the property seller acquired at below market value after purchasing as a result of a . . . short sale . . . where any increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to distress sales and typical arms-length market sales." Best Practices for Loans Involving Possible Property Flips. Freddie Mac Guidelines
Successful short sales do not attempt to cut out the middleman, but rather recognize the crucial role he plays. A middleman brings the carrot from the farm to the grocery and we all recognize that important role. Very few of us choose to travel directly to the farm to pluck our own carrots so as to secure a lower wholesale price on carrots. We recognize the value in delivering that carrot to the retail market even though nothing has actually been done to the actual carrot from the time it’s plucked from the ground until the time it hits the local store – it’s the same “unrepaired and unimproved carrot”.
Listing agents and their seller who truly understand how to best get their client’s house sold with a short sale recognize that the retail buyer is not prepared to do what it takes to get a wholesale price and the short selling lender is not willing or able to what the retail market demands and therefore recognize the value that the middleman brings to the transactions – buying at wholesale and selling at retail. These sophisticated agents embrace the middleman investor.
The current crop of investors, analysts say, are playing a crucial role in reviving the housing market . . . Somebody’s got to clean up those messes, and that’s what the good flippers do, observers say. They might try to sell right away or rent the houses for a while. Either way, it’s good for the whole neighborhood . . . “They’re vital,” [says a housing consulting firm] of the good flippers. “I can’t think of a conceivable way that we could turn the market around without them.” Bulletin 2009-24. Collins, Thomas R. Home Flippers Are Back in Florida. A Good Sign?
An offer from a well trained real estate investor supported by professional negotiators has a far greater likelihood of success than a retail offer from an end user buyer. The retail market largely ignores properties listed as “Potential Short Sale – Subject to Bank Approval” and those buyers who do pursue these listing usually lose interest or find another property during the time it takes to get the short sale approved.
Therefore, chasing the retail market directly increases the chance that a short sale will fail and that the seller will lose the property to foreclosure.
On the other hand, an offer from a well trained real estate investor who specializes in short sales dramatically increases the chance of success with the short sale for the seller and the listing agent. The investor can maneuver the intricacies of the short sale process, wait as long as is necessary, and close the gap between the realities of the short sale and the expectations of the retail market.
About the Author Ben Pargman is an attorney, author, real estate investor, national speaker and teacher on investment opportunities involving pre-foreclosure lender workouts known as short zales. His peers suggest he and his company have negotiated more successful short sale transactions than anyone in the country, and recognize him as the nation’s leading authority on short sales and the investment opportunities they present.
Mr. Pargman practiced Real Estate and Commercial Lending at a top Atlanta law firm for several years where he represented national lending institutions. Mr. Pargman is the founder and CEO of The Short Sale Service, Inc. a national service provider of residential real estate lender work-out negotiations headquartered in Atlanta, Georgia.
In addition to being a highly in demand teacher for the real estate education community, he has spoken for and chaired continuing education programs for the Institute of Continuing Legal Education in Georgia and Lorman Education Services.
Just like in any profession you have good, bad and the ugly. The good investor will work with an agent and fully disclose with all parties.