David Bulava - Real Estate Agent - Arlington Heights, IL Area

Happy Memorial Day

2011-05-30T07:36:00.001-07:00

How Long Will It Take For The Bank To Foreclose On A Home?

2011-05-26T12:22:00.001-07:00

There is no question that if you live in Illinois, you may have time on your side. According to Realty Trac, an online listing firm for distressed property, says that the foreclosure process took an average of 494 days.

The time has increased steadily since the first quarter of 2007, when the average foreclosure took just 243 days and the housing crisis was still in its early stages.

On a positive note, this lag may be good for homeowners who are struggling to keep their homes, catch up on their mortgage payments. On the flip side, this gives homeowners who do not have the ability to “catch up”, or just give up and decide not to pay because they owe more than their home is worth, a “strategic default”, more time to live rent-free. Housing experts say this could be bad for the market overall because the longer it takes for the market to absorb distressed properties, the longer it could take for home prices to stabilize and further delay the recovery of the housing market.

The foreclosure process has slowed across the country as lenders try to keep up with the large volume of cases as well as the delays caused by the re-examination of many cases due to the robo-signing controversy. But, Illinois is especially slow because it is one of the few states that require lenders to work through the courts to foreclose on properties. Other, “non-judicial” states allow lenders to avoid many of the time-consuming legal steps, like a sheriff's sale, which is why the process in those states is much shorter.

As a side note, the five states with the longest foreclosure times are all judicial states.

Government officials in Illinois have also intervened to slow down the foreclosure process. In 2009, Cook County Sheriff Tom Dart briefly halted evictions, while Gov. Pat Quinn signed a measure giving delinquent borrowers grace period of up to three months.

Also, some lenders have decided it's not worth the time or the cost to foreclose, choosing to halt or delay the process which leaves properties in legal limbo. These “lender walkaways” have become a big problem in many struggling Chicago neighborhoods. This “ignoring” of the problem results in vacant homes that become the city's problem.

Is Owning A Home Still the Best Long Term Investment?

2011-05-25T13:42:00.000-07:00

Even though many assume that housing may have lost its luster as an investment, a nationwide Pew Research Center survey shows that the recent drop in home values has done little to shake the confidence of the American publics perception of homeownership.

According to the survey:

81% of adults agree that buying a home is still the best long-term investment a person can make.

What do homeowners who have lost value think?

82% of homeowners who say their homes are worth less now than before the recession began agree that homeownership is the best long-term investment a person can make.

What about Renting?

The survey shows that even in the face of the five-year decline in prices, Renters are still intrigued by the idea of homeownership. When asked if they rent out of choice or because they cannot afford to buy a home, only 24% said that they rent out of choice. Additionally, 81% of renters said that they would like to buy a home.

Suggestion 5 of 5 – Five Ways To Determine The Value Of Your Home

2011-05-23T05:00:00.000-07:00

Get an Appraisal:

An appraisal will cost approximately $250 - $400, depending on your home size and uniqueness of the property. The appraiser will come to your home and itemize the number of rooms and amenities (e.g. swimming pool, fireplace, etc.) and will pull comps from other nearby homes that sold recently. Once they have completed their review of your home, the comps, and the market, they will furnish you with an appraisal. Appraisals generally do not take into consideration as to what price “active buyers” are willing to pay for a home and it’s amenities.

Suggestion 4 of 5 – Five Ways To Determine The Value Of Your Home

2011-05-22T11:49:00.001-07:00

Get a Comparative Market Analysis (CMA):

If you still are not sure, ask a real estate agent for a CMA. A good Realtor will use comparable properties that are active, under contract, sold and cancelled/expired, the price per square foot and the buying habits of active buyers in the market…what they are willing to pay for similar upgrades, amenities, location and condition. Most agents will be more than willing to provide a CMA for free.

Suggestion 3 of 5 - Five Ways To Determine The Value Of Your Home

2011-05-21T08:47:00.000-07:00

Square Foot Pricing

Some neighborhoods are a mixed bag of architecture, style and size, which means if you can't find another home similar to yours, you can use square foot pricing. Take 3 - 5 homes as similar to yours as possible, add up the square footage and divide by the number of homes. This will give you an average per square foot for your comps. Then, add up the sold price of each home and divide by the number of homes to get the average. Lastly, divide the average sold price by the average square foot to get the average price per square foot. Once you have the average price per square foot, multiply it by your home's square footage.

Example:

Step 1: Find the average sq. ft. of comps

Home 1: 1,950 square feet
Home 2: 2,400 square feet
Home 3: 1,800 square feet
Home 4: 2,050 square feet
Total: 8,200 square feet

8,200 / 4 = 2,050 sq. ft.

2,050 is the average sq. ft. of your comps

Step 2: Find the average price of comps

Home 1: $310,000
Home 2: $410,000
Home 3: $299,000
Home 4: $325,000
Total: $1,344,000

$1,344,000 / 4 = $336,000

$336,000 is the average price of your comps

Step 3: Divide the average price by the average sq. ft.:

$336,000 / 2,050 = $164/per sq. ft.

$164 is the average price per sq. ft. of your comps

Step 4: Set the price of your home:

Take $164 and multiply it by your square footage to get a price. For example, if you have a 1,975-square-foot home, multiply it by $164 (e.g., 1,975 sq. ft. x $164 = $323,900).

And presto…there’s your price. $323,900

Suggestion 2 of 5 - Five Ways To Determine The Value Of Your Home

2011-05-20T07:34:00.001-07:00

Look at Unsold Homes:
Homes on the market that haven't sold yet are also a consideration, although not a strong one, since it's unproven whether the house will bring the money it's asking. But, look at the active competition. Find a home most similar to yours and find out how many days it has been on the market. If the house has been sitting for a while (more than 30-60 days), you will see the market is not convinced that is the correct price for that home. Once you see the "Sold" sign, find out how much above or below the list price it sold for. This will give you a good idea of how the market is behaving and how aggressive you can be in setting a price.

Suggestion 1 of 5 - Five Ways To Determine The Value Of Your Home

2011-05-19T09:44:00.001-07:00

Review Comparable Properties:

Comparable properties play the biggest role in setting the price. Considered part art, part science, "comps" are regarded as the single-best tool in determining a home's value. There are some tricks determining which comps are the best, but you can view general comps on your property or anyone else's on Zillow.com, simply by entering an address.

Tips for Buying New Construction

2010-09-16T12:43:00.000-07:00

Buying a brand new a shiny, un-lived in home has a certain amount of appeal. There is no previous homeowner who has affected the home or who has emotional ties to the home that will factor into the negotiation process. New homes are usually built with floor plans that reflect the latest, most popular design trends.

In many ways, buying new construction is an entirely different animal than buying an existing home. While you still need to determine your budget, decide which home features are must-have and secure financing; the process of buying new construction involves a number of different steps.

Representation

Always have independent agent representation when considering new construction. The builder will have sales agents of their own, but they are paid to represent the builder's interests, not yours. Many will use pressure tactics to encourage you to sign the contract.

A buyer's agent will act as your fiduciary and provide unbiased information on the pros and cons of any potential transaction. If you find developments that you are interested in learning more about, channel everything through your own independent representation. Protecting your own welfare is paramount.

Learn About the Development(s)

Buying a home in a planned development necessitates careful research of the development and neighborhood itself - more effort than you might otherwise put into learning about an existing neighborhood surrounding a resale.

Research the Builder(s)

Accurately and fairly reviewing a builder's history is a crucial step if you're considering the purchase of a newly built home. Don't rely on information provided by representatives of the builder or subdivision, as it will be their goal to represent the builder in the best possible light.

Go to the courthouse to see if any liens or lawsuits have been filed against the builder, and verify how they were resolved. Check with the Better Business Bureau for any serious complaints against the builder registered by past homeowners or subcontractors. If at all possible, contact homeowners currently living in homes previously constructed by the same builder to see how they feel about the quality of craftsmanship after having actually lived in the home. Experienced real estate agents should also have a good understanding of which builders have a good reputation locally, and which do not.

Be Cautious with Upgrades and Extras

Upgrades to the home itself are features (such as hardwood flooring or high end appliances) that you pay extra for to improve the home based on your tastes. Builders can make a lot of money on upgrades, because they get the parts and labor at favorable rates and generally tack on a large markup.

Make sure you know the base feature list of the model you are purchasing by heart. When the builder offers upgrades, make sure you understand exactly what is being offered by asking questions and taking notes.
Do your own research to compare the cost of the feature plus installation as offered by the builder with what it would cost to have the work done independently after move in. If the builder's version is far and away more expensive, bidding the work out to independent contractors after you move in is probably the smart move. If the costs are similar, however, it may be less stress to have the work completed by the builder in advance.

Hire an Independent Home Inspector

Many people who purchase new construction fall into the trap of thinking that because the home is newly built, the important step of getting a detailed home inspection is unnecessary. Simply put, new construction does not guarantee sound construction, and skipping a professional inspection can leave you open to future problems that might crop op as a result of building flaws or cut corners. Even homes built by the most scrupulous contractors can have defects that are not obvious to the untrained eye.

Many builders will proved an all-inclusive home warranty as a part of the purchase agreement. This should not dissuade you from getting an impartial inspection: most warranties have a limited lifespan, and many original issues with home construction may not become apparent until many years later.

Shop for Lenders

Builders almost always have a preferred lender (sometimes even an in-house mortgage company), and will typically try to steer you to using this lender to secure the mortgage for your new home. Some builders will even offer deals on the purchase price of the home or free upgraded - contingent upon you using their lender.
Using the builder's lender, especially without first shopping around for mortgages and other sources, is highly problematic. A mortgage provider who has a working relationship with a builder or development is out to make sure they can get you into a loan for the property. What they aren't necessarily doing is making sure you get the best deal. Always shop around for the best possible rate, lowest closing cost and fewest hassles.

5 Home Features That Excite Buyers

1. Stainless Steel Appliances:

Many buyers like the sleek, powerful appearance of stainless steel kitchen appliances. Part of the attraction may be that a home kitchen with stainless steel appliances suggests the professionalism of a commercial kitchen. The modern look of the appliances themselves can be incorporated into almost any kitchen design (from modern interiors to more traditional styles). A stainless steel finish is not for everyone, however, so keep in mind that the appeal of these contemporary gadgets will not be universal.

2. Hardwood Floors:

Hardwood floors are sought after by home buyers across all property types and architectural styles. Hardwood flooring has a timeless style and is more durable than other types of flooring. Synthetic wood floors are an option for owners who can't afford hardwood - just know that most potential buyers will know the difference right away.

3. Quality Fixtures:

Upgrading the smallest details can often go a long ways to improving your home's appeal to buyers. Replacing outdated or lower-quality doorknobs, faucets, light switch/outlet covers, and drawer pulls can be a relatively inexpensive way to make over a bathroom or kitchen. You can also greatly enhance your home's appeal by updating lighting fixtures throughout your house, but keep in mind that higher-end lighting fixtures can get expensive fast. Whenever replacing fixtures, make sure the replacements coordinate with both any remaining fixtures and the interior aesthetic of your home.

4. Surround Sound:

The popularity of larger flat panel and projection screen televisions in recent years has in turn generated greater interest in advanced home audio that compliments near cinema-quality picture. Building a surround sound system into your living/media room can entice potential buyers who may be excited by the idea of a new dimension of home entertainment but disinclined to go through the process of installation and setup.

5. Slab Kitchen Countertops:

Granite countertops get a lot of attention as a must-have finish for any contemporarily designed kitchen, but in reality a number of other slab materials can be used to achieve a similar look at a lower cost. One of the major selling points of granite countertops is how easy they are to care for: the hard, nonporous surface is much easier to clean than a tile counter top with grout lines. Solid Synthetic surfaces (such as Corian), composite stone (such as Silestone), limestone, soapstone, marble, quartz and butcher-block slab counters all come with easy care and a more attractive appearance than laminate or tile countertops.

FHA203K Rehab Loans

2010-09-01T08:15:00.000-07:00

An FHA loan can provide a great deal of help to many families, but not everyone knows exactly what is and who it helps. To start, “FHA” stands for Federal Housing Association. This is the organization that administers the loan, and it is also a part of the Department of Housing and Urban Development (HUD.) Since the FHA doesn’t provide the loan directly, the borrower must contact a financial lending institution to receive the loan.

What is Required?

The FHA does, however, investigate the applicant and insures the lending institution against loss of principal, just in case the borrow does meet all the guidelines of terms of the mortgage. The borrower, who pays an insurance premium of one half of one percent on declining balances for the lender's protection, receives two benefits:

1. A careful appraisal by an FHA inspector.

2. A lower interest rate on the mortgage than the lender might have offered without the protection.

This federal assistance mortgage loan, secured by real property through the use of a mortgage note, can only be issued by federally qualified lenders. Other deciding elements of the application process include getting the house appraised and approval of the buyer’s credit.

The main mission of this kind of loan is to provide lower-income families with the resources to buy a home that they would otherwise not be able to purchase. The program started around the time of the Great Depression when foreclosures and defaults were on the rise. Nowadays, it strives to provide the same kind of assistance.

Insurance

You may be asking, “How does this program survive and where does it get its money?” Well, upon its entrance into the home-buying market, the loan was intended to provide lenders with enough insurance to make a profit. Today, it is fairly self-supporting thanks to the premiums that are paid to the lenders by borrowers.

While this loan program helps families in need maintain a home they would otherwise lose, it is more centrally focused on rehabilitation. The FHA 203(k) program could be categorized as a “home improvement” loan system. One of HUD’s main values is to open provide greater opportunity for homeowners to capitalize on their property, and this mission is carried out through the 203(k) program as well.

Lenders Won't Short You

Some lenders have been known to partner with nonprofit organization to assist with the revitalization of many homes, incorporating other housing assist services to give the borrower as many useful resources as possible.

Through their generous participation, lenders further their dedication to the Community Reinvestment Act (CRA), which was created in 1977 under the Housing and Community Development Act. The CRA is a federal law that encourages banks and other saving services totarget and assist different segments of their respective communities with housing, especially lower income families.

What are All Its Uses?

The program isn’t always used directly by the lender. It can also provide money to rehabilitate property in three different ways:

- The loan can be used to purchase a dwelling on the land on which it resides, then restoring and reviving the property.

- The loan can be used to refinance current debt and refurbish a home (like most borrowers would use it for.)

- The loan can be used to buy a dwelling on a separate site and then move it to the land that has been mortgaged, then they can proceed to rehabilitate it in its new location.

No matter how you ended up with existing debt or a run-down home that you were unable to afford repairs for, the FHA 203(k) loan rehabilitation plan may be your light at the end of the tunnel. Lenders a generally rather generous and it can make an enormous impact in the life of you and your family.

For further comments of question, please feel free to contact me anytime.

What’s the One Unbreakable Law of Real Estate?

2010-08-20T07:45:00.000-07:00

“Perform due diligence!” is the one law you should never break in any kind of real estate deal – residential, multi-occupant, or commercial!

What is due diligence? It’s a common phrase for the evaluation of a property and its surrounding environment before you commit to buying it.

Due diligence has two objectives. First, you want to reduce or eliminate risk! Needless to say, you’ll be assuming a large loan and will want to know exactly what’s right or wrong with a property before you sink any money into it.

Two, due diligence allows you to uncover real bargains, especially for investors. On the surface, one property may look like a “loser,” but a closer inspection may reveal that the building is structurally sound and requires only minor and inexpensive maintenance and repairs.

One part of due diligence is what you’d expect – the physical inspection of the property and inspection of all documents and records concerning that specific property. The other part is the inspection of the documents and records concerning that property.

In this article, I’ll just talk about the physical inspection portion of due diligence.

Physical Inspection of Properties

Below, I’ve listed all the inspection tasks which should be performed by a professional inspector. Of course, you should visit the property as well. Many times, a quick “eyeballing” can reveal any obvious signs or poor maintenance or decay - a leaky roof, wet basement, foundation cracks, cracks in the walls, plumbing leaks, etc.. In those cases, you’ll know you don’t need to waste any further time on that property.

As I mentioned earlier, such an inspection may reveal that you’ve actually got a bargain on your hands instead of a “dog.” In such a case, you’ll want to purchase or invest in that property quickly.

What happens when you find problems in a property and still like it? Well, then, you can require that the seller correct those problems or reduce the price before you sign any contract.

In general, defects fall into two categories. One category contains the obvious defects – wet basements, peeling paint, broken windows, leaky plumbing, warped floors, etc.

The other category contains the more expensive and dangerous hidden defects. These can include corroded pipes in the walls, roof or window leaks that don’t show up until it rains or snows, subtle cracks in the foundation.

Obviously, you want to make sure these hazards are spotted before you ever sign a purchase agreement. They can cost you a lot of money in the long run, not to mention the fact that they can send your blood pressure through the roof!

What Do Professional Inspectors Look For?

Below are the items inspectors examine when they check a property:

• Overall structural integrity
• Property drainage/landscaping
• Walks and drives
• Foundation, footings, crawl space, basements, sub-flooring, decks
• Exterior walls, siding, trim
• Windows, doors, cabinets, counters
• Gutters, downspouts
• Roof, roof shingles, roof structures. chimneys, attic
• Floors, walls, ceilings, etc.
• HVAC systems
• Plumbing systems, (fixtures, supply lines, drains, water heating devices, etc.)
• Electrical system (wiring, service panel, devices, and service capacity
• Energy conservation/safety Items
• Insulation & ventilation
• Moisture intrusion/mold

And, of course, we can’t forget the voracious appetites of….bugs!

Pest Control Inspection

Depending on the area of the country in which you live, insects can cause a heckuva lot of damage to a property!

I’m talking about such bugs as termites, carpenter ants, powder post beetles, and any other insect that likes to munch on wood. Then, there’s fungus, in the form of “dry rot.” It can also cause a lot of destruction.
In such cases, you’ll need to hire the services of a specialist (pest control inspector) to examine the property.

If the operator identifies any problems, he or she should provide you with a diagram that pinpoints the location of the infestations. If serious problems exist, they need to be corrected immediately! The expense is usually paid for by the seller.

To protect yourself against any of the problems I mentioned above, ensure that the purchase contract provides for cancellation without penalty or loss of money if the physical condition of the property doesn’t meet standards.

So, there you have it – all the physical items you or an inspector should check on to meet the law of due diligence! Remember – never, ever break this law! To learn more about any special concerns for due diligence in our area, contact me today!

The Advantages and Disadvantages of FSBOs

2010-07-15T09:36:00.000-07:00

Many home owners think about selling their own home but relatively few attempt it. Why? Because it's an extremely time-consuming and often exhausting process, especially if you're working a full-time job! It's the Realtor who takes this burden off your back.

Nonetheless, I don't discourage you from putting your home on the market and attempting to sell it yourself.
But before you do it, I do encourage you to become extremely knowledgeable about the process and aware of the both advantages and disadvantages of it.

Below, I've provided information on the benefits and drawbacks of doing a "For Sale By Owner" (FSBO) sale.

Read it carefully and then make your decision!

Advantages of Selling Your Own Home

Of course, the biggest advantage a FSBO is that there's no commission to be paid to a Realtor. You get all the proceeds from the sale, minus any marketing costs you incur.

A second advantage is that you have complete control of the transaction. You don't have to rely on anyone else. You're totally independent.

A third advantage concerns your equity. If it's low, you have the possibility of selling your home without having to write a check.

A fourth advantage is that you don't have to rely on a realtor to schedule showings, answer inquiries, etc.

Disadvantages of Selling Your Own Home

Perhaps the greatest disadvantage is the tremendous amount of time you have to put into the sale.

It's a time-consuming process to do all the paperwork, the marketing and advertising, the showings, etc. by yourself - not to mention the hours it takes to get acquainted with all the legal, financial, and other issues. You must be prepared for this.

A second disadvantage is the costs in terms of marketing and advertising. If you don't exactly what you're doing, this can be very expensive!

A third disadvantage is that you won't have access to the Multiple Listing Service (MLS) unless you pay a fee to have your listing included. If you don't pay that fee, then you'll end up hunting for buyers one at a time, a very inefficient, ineffective, and frustrating process.

The fourth disadvantage relates to your knowledge of the market. If you're not knowledgeable about it, you may not price your house correctly.

That is, you may underprice it or overprice it. If you underprice your home, you lose money. If you overprice it, you lose buyers. By the same token, if you do find a buyer and you're not experienced at negotiation, you could be taken advantage of.

A fifth disadvantage relates to a belief of some buyers. They believe that since you're selling the house by yourself and not paying a commission, then they're the ones who should get the savings instead of you!

My Advice: Do your homework before considering selling your home by yourself! And, if you do decide to go the FSBO route, be fully prepared in all aspects of home sales!

If you'd like more information and advice on selling your own home as well as my real estate services, contact me.

Investor – Do You Know the 7 Basic Principles of Real Estate Valuation? (And a Happy 4th of July!)

2010-06-30T14:18:00.000-07:00

Alright, I'll be upfront - I had an absolute 'blast' making this video. I'm here to fulfill my patriotic duty to ensure you're safe this 4th of July by highlighting THE WORST firework mistakes I found on YouTube. Yes, that's right, this is a video you can't pass up. But what's even more important is the time is right to declare your "Independence Day" from 'the man' and educate yourself on investing in income producing property. So, watch my viral 4th of July safety video, plus learn how to get started on your path to financial Independence Day!

With knowledge and mastery of the seven principles listed below, you’ll be able to valuate properties with an objective eye and sort out the good deals from the ones that are “money pits.”

Before we get to the principles, be aware that all of them relate to a fundamental maxim of real estate – “the highest and best use” of a property. In a legal sense, “highest and best use” is the use of a property that makes it the most valuable to a buyer or the market.

In a business sense, it means one single use will result in maximum profitability through the best and most efficient use of the property.

Okay, here are the seven principles:

Principle 1: Demand

In plain old English, do buyers want or need to own or possess a property and do they have the money to satisfy that need?

If, for example, you have a home (or rental property) in an upward-trending neighborhood, then you can anticipate a good-to-great demand that will allow you to charge accordingly!

Principle 2: Utility

The term “utility” refers to a property’s intended use; e.g., single-family home, rental property, retail function, industrial use, etc.

The gist of this principle is that you want a property to fulfill its intended purpose. That way, it’s in high demand in the right market.

Here’s an example of unfilled purpose: an upscale boutique stuck in a working-class neighborhood. Since the residents aren’t likely to have the money for luxury goods, this retail store would likely not have a great or profitable future. Clearly, this is not the “highest and best use.”

Principle 3: Scarcity

Put plainly, “scarcity” refers to the fact that the value of a particular property is set by comparing it to similar properties.

In technical real estate language, the “theory of substitution” states the following: “The value of a property replaceable in the market tends to be set by the cost of acquiring an equally desirable "substitute" property.”

Principle 4: Transferability

“Transferability” refers to the ease with which ownership rights are transferred from one owner to the next.

As you can imagine, investors love properties that are easily transferable (or relatively so). At the same time, they hate properties encumbered by liens, judgments, etc. because such legal issues eat up time and money and can ruin an otherwise good deal.

Principle 5: Regression

When a property’s value is negatively affected by surrounding properties, then you have a situation of “regression.”

The price of your property deteriorates when the nearby properties are of lower value, have inferior construction, or are just plain in lousy condition. Needless to say, you don’t want to buy the best property in a bad neighborhood. You’d simply be throwing your money away!

Principle 6: Progression

“Progression” is the opposite of regression. In this case, a property’s value rises upward because the surrounding properties have better quality, are in better condition, and possess a higher value.

Another way to spell progression is “opportunity!” In other words, you can purchase a sound but neglected/unmaintained property in a good neighborhood.

Then, by bringing the property up to neighborhood standards through repairs, maintenance and upgrades (“rehabbing”), you have the ability to gain great value at a very low cost.

Principle 7: Conformity

“Conformity” refers to the fact that property values are maximized when a property conforms to (is similar to) the properties surrounding it. Of course, the opposite is also true. If a property doesn’t mesh well with surrounding ones, its value decreases.

So, for example, if you buy a neglected property, you should renovate it to conform to neighborhood standards, but not over-improve it. Over-improvement can push that property into a higher cost bracket and limit your opportunities for selling or renting it!

In summary be aware that there many variables that can affect the highest and best use of a property. Zoning, re-zoning, the path of progress, etc. – all these factors can change the value of a property. That means, as an investor, you need to stay on top of the market!

Want to learn more about the fundamentals of the real estate market? If so, contact me right now at dave@davebulava.com to discuss this matter or any other real estate matter of interest to you! I look forward to talking with you!

What Are Pre-Foreclosures in the Real Estate Market and How Can They Benefit Me As an Investor?

2010-06-10T09:43:00.000-07:00

A foreclosure is a formal legal process. Lenders begin the process when home owners fail to live up to their mortgage obligations. As a result, the lenders want the property back and, depending on the state, file a law suit or a notice of default.

A pre-foreclosure sale is one that takes place between the date when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. A pre-foreclosure is not a formal legal process; it’s an opportunity for you to help beleaguered home owners out.

Before I discuss the benefits of pre-foreclosures for you as an investor, let’s step back a moment and look at the reasons for foreclosures.

Beyond the recent “mortgage meltdown” due to the recession, there are many reasons that foreclosures occur. Often, people tend to think that foreclosures occur because of poor financial management by home owners and others.

While this certainly can be true, there are really many different reasons why foreclosures take place – personal problems (divorce, illness, etc.), the tendency of first-time buyers to overextend themselves, etc. Also, before the recession, foreclosures were caused by predatory lenders, lenient terms by all lenders, and low interest rates.

Now, let’s look at the benefits of making a living as an investor in the pre-foreclosure market.

What Are the Pros of Working in the Pre-Foreclosure Market?

If you’re a careful investor, the pre-foreclosure offers you many benefits:

- The ability to buy properties at a deep discount

- The ability to craft deals that cost you very little money.

- No complicated paperwork

- The ability to inspect properties (to avoid “money pits)

- The ability to structure sales agreements with favorable terms.

- The opportunity for personal and financial freedom (you can set your own hours, rules, etc. as an independent investor)

Now, as you know, every field has its disadvantages as well as advantages. So, let’s look at the cons next.

What Are the Cons of Working in the Pre-Foreclosure Market?

Perhaps the number one disadvantage is dealing with the owners of the properties. They’re not in a good situation, and, most of the time, they’re not happy about it.

That means you need to deal with their anger and frustration in a diplomatic manner and have a thick skin at the same time. The best way to do this is to approach the situation as a problem-solver; that is, you’re there to help them make the best of a bad situation and to help them avoid the embarrassment of foreclosure.

A second disadvantage is that there’s a lot of courthouse work to do to ensure any pre-foreclosure deal is profitable; for example, making sure there aren’t liens or other legal entanglements. You’ll definitely need to pay attention to all the details in these records.

The final disadvantage is that you’ll face some stiff competition in this market. So, you’ll have to stay on top of it at all times!

Of course, there’s a lot more to learn about the pre-foreclosure market, and you can find out what that is by going right now to http://davebulava.com/gold_distress.asp

And if you have any questions or topics you'd like to discuss, contact me at 847.670.1060 or email me at dave@DaveBulava.com.

Should I Just Walk Away From My Mortgage?

2010-05-26T07:53:00.000-07:00

...well, only if it were that simple. Here is another option:

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 847.670.1060 and we can discuss this topic or any other area of real estate.