Real estate property values are at their lowest mark in more than 20 years.  The market is paralyzed with hesitant buyers unsure that the American Dream still includes home ownership. 

The weak economy and unimproved employment situation has combined with more stringent lending practices to put many would-be homeowners in a holding pattern.  While it is clearly a buyers market, with the lowest interest rates in many years and with depressed asking prices from serious sellers, the buyers are on the sidelines.

Real estate investors know this is the time to make money.  When the amateurs are not in play, investors get serious.  And, one of the most appealing aspects of this “down” market is the availability of countless short sale opportunities. 

Profitable real estate opportunities abound in a plentiful short sale environment.  These properties may not yield immediate profits, but real estate investors know that time is on their side.  More and more investors are coming back to the market and acquiring single-family residences that are in short sale status and that are in need of repair.

A popular formula has been to buy low, hold and sell until the market improves.  After negotiating the shot sale, the investor makes tax-deductible improvements to the property and enters into a lease that covers the property’s overhead. 

Experienced investors have profited in bad markets before.  They know the market will come back.  And, while homeownership may not be at the top of the list for first-time buyers right now, the investors are confident that the advantages of homeownership will win out in the long run. 

In terms of establishing roots, tax advantages and school enrollment, the advantages of ownership far outweigh the risks of being a tenant.  While there are not as many buyers on the scene right now, demand for houses for rent is strong.

To be successful in the short sale market, put your paperwork together, build financial support and be positioned to obtain pre-approval letters from a lender.  Then, get the word out that you are a solid landlord.  The undervalued properties are out there, right alongside persons looking for rental properties.  What are you waiting for?     

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It may be time to revisit your short sale business plan.  When short sales originally became a viable means to acquire investment properties, most investors budgeted acquisitions in the low to median selling price range. 

It’s no secret that times are changing and changing fast.  The recession has hit everyone.  It has been especially difficult for families who relied upon the security of big jobs and leveraged those jobs to purchase their dream homes. This high income level consumer has been burned.  They are now finding those high paying jobs are harder than ever to replace.  Very often relocation is necessary.

When driving down the street in a luxury neighborhood, keep in mind that one of every seven homes with a mortgage of $1,000,000 or more are in some stage of delinquency.  The fastest growing sector of distressed housing is in fact, high priced homes.

Luxury homes or high-end distressed housing can yield big profits.  Remember the oldest adage of the real estate market; location, location, location.  The luxury short sale can be time consuming and more complicated to finalize but there is definitely money to be made by the investor with the credit, willpower and courage to take a risk.

In addition to the sometimes complicated financing attached to these homes, there is the question of demand.  Many of today’s potential buyers in this price range have a home to sell.  Investors cannot get tied up waiting for a potential buyer’s home to sell.

Additionally, many of these luxury homes have taken big hits in the BPO. This is not an emotional judgment; it is simply the way the market is.  However, convincing the seller that the property they have dreamt of buying is not worth the amount of the mortgage is no easy task.

The lender may also be disgruntled with the magnitude of the loss.  In fact, they may make it difficult for the seller to get out without a cash contribution.  Initially all parties are likely to talk tough.  The investor is not emotionally charged and does not have to answer to a board.  At some point, the seller and the lender are likely to realize the hard reality. 

When the investor sees the door of opportunity swing slightly open, it is time to strike.  Always have a statement of funding and a carefully prepared BPO of your own.  As both the seller and the lender need to realize, sometimes it is better to take a bit of a loss and move on than it is to fight a fight that cannot be won.

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Slowly but surely, the Federal Housing Administration (FHA) is lowering their delinquency numbers.  June marked the fifth straight month that FHA delinquencies have declined.  However, there is reason for little confidence in the overwhelming numbers of late payers and looming foreclosures.

The FHA reports that in fiscal year 2010 the agency has paid 207,715 claims.  124,191 of these claims were loss mitigation claims while 83,524 represented property conveyances. 

As of June 30^th, 532,757 mortgages guaranteed by the FHA were 90 days late constituting an 8.3 percent seriously delinquent rate.  The May seriously delinquent rate was 8.4 percent.  In January, the rate was 9.4 percent recorded in January 2010.

The FHA reports an upturn in new business.  New FHA mortgages amounted to 150,911 accounting for $26.4 billion in new business.  The May total for new policies amounted to 124,754 and $22.4 billion. 

A breakdown of the June mortgages shows that 115,831 transactions were purchase money mortgages while 29,776 transactions were refinanced mortgages and 5.304 were reverse mortgages.  Of the 29,776 refinance transactions, 9,682 were former FHA mortgages while 20,095 were previously conventional mortgages.

168,915 new insurance applications were processed by the FHA in June compared to 181,524 in May.  The FHA projects a seasonal downturn for the next few months.  Overall, the agency had 6,402,527 mortgages amounting to $865.5 billion in force on June 30^th.

The FHA and Veteran’s Administration have the most flexible owner occupied first mortgage policies in existence right now.  The strength of these lenders lies in their low down payments and flexible terms.

Since 2009, there has been concern that the FHA would get caught up in the lax credit practices from Fannie Mae and Freddie Mac, whose lending policies have severely damaged the housing market.  With the end of low doc loans and the new increased down payment requirements, the goal is that every loan be a successful, affordable loan.     

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While the May sales report released by the U.S. Commerce Department showed a significant drop in sales, most real estate agents were not surprised.  When the 2009 First Time Homeowner Tax Credit expired last fall, a significant drop in sales also occurred.  The market received a big sales boost when the new and revised legislation was expanded and amended to include existing homeowners in the most recent tax credit bill.

When the tax credit expired on April 30^th, the real estate market was destined to take a hit.  The 2.2 percent decrease in sales was larger than most agents expected but when one considers the number of buyers that rushed to get under the April 30^th wire, the fall-off is not unnatural.

There are some interesting numbers in the May report. One of those numbers is the fact that 25 percent of all sales are cash transactions, or at least transactions that do not include mortgage contingencies.  This suggests that May’s purchasers are very qualified and will either use cash to acquire the properties or have arranged private, alternative financing.

With today’s yields on bonds and on money market funds, private lenders may like the interest rates and security offered by prospective real estate borrowers.  First time purchasers and purchasers with proven track records can very easily find private financing.  These arrangements are usually made prior to the execution of a purchase and sale agreement so no mortgage contingency is necessary in the contract. 

The absence of a mortgage contingency in negotiations can usually save the purchaser money on the front end, or purchase price.  Sellers and buyers are wary of today’s lenders and the mounds of necessary paperwork required by the new reform legislation.

Another interesting statistic in the May Real Estate Sales report is the fact that 14 percent of May transactions were attributed to investors.  The return of the real estate investor t the overall marketplace is very necessary to cut into the oversupply of real estate properties.  For today’s investors, opportunity is knocking on the door.

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When the Obama Administration launched its first home loan modification program, the banks offered stiff resistance.  At first, lenders did not see the merit to helping unemployed and distressed homeowners.  As the months of failed workouts and increasing delinquencies began to mount, banks began to change their view of the foreclosure crisis.

Overwhelmed with the prospect REO’s and with Fannie Mae and Freddie Mac in dire straits, the government launched new loan modification programs under its Home Affordable Modification Programs (HAMP).

The problem is that the banks and the government misread the homeowners.  Owning a home was no longer the American Dream.  Starting afresh with a new job and putting dinner on the table replaced owning a home as the American Dream. 

Since March 2009, more than 1.24 million homeowners have enrolled in HAMP plans.  More than 15 million distressed owners had been offered admittance to the program.  Of the 1.24 million that have tried the program more than 429,000 have already failed.  Only 349,00o modifications have been approved after the trial period. Most failures are occurring during the mandatory period.

With so many failures and with many homeowners actually opting to “walk-away” from their underwater mortgages, foreclosures are occurring en masse and the pipelines are filling fast.  So, the Administration has put forth a new program entitled Home Affordable Foreclosure Program. 

Under the HAFA program, qualified homeowners are given pre-approved listing terms, including price and occupancy dates and are given plenty of time to properly market the home. Basically, HAFA sets the stage for a pre-approved short sale.

Investors can avoid some of the hardships associated with foreclosure auctions and some of the resistance often accompanying short sales by tracking these HAFA listings. Another advantage of HAFA properties is that all listing information is stated for the investor’s consideration.  This can save the investor time and footwork.  Investors are gravitating to the HAFA program because there is an absence of desperation and a feeling of cooperation with each transaction.   

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If you have ever had your eye on a dream commercial real estate opportunity, the time to strike may be now. New data contained in the Trepp Report confirms what economists and real estate brokers have been saying for almost a year.  The commercial real estate market is suffering and the market is ripe for qualified investors.

Consider these facts:

·                     In 2009, commercial sales and commercial loan originations were even lower than in 2008.

·                     Perceived values of commercial real estate dipped by 29 percent in 2009.

·                     Vacancy rates for commercial real estate are nearing record lows; office space occupancy is down 19.7 percent.  19.2 percent of retail space is vacant.  13.2 percent of industrial space is vacant and 8.9 percent of multi-family properties are unoccupied.

·                     Apartment rentals are down 6 percent in the first quarter alone as rental rates for industrial rates are off 9 percent.

Elizabeth Warren, the Chairperson of the Congressional Oversight Panel for TARP, predicted that half of all the country’s commercial real estate loans would be underwater by 2010.  Ms. Warren is known as one of the few straight shooters in Washington.

The competition for tenants has led property owners to accept new and costly concessions including state-of-the-art upgrades, months of free rent and guaranteed heating and cooling costs.  These concessions have created over-leveraged and delinquent property owners who cannot find refinancing.

In many cases, the only options are distressed sales, foreclosure or short sales; in other words the perfect environment for the well-positioned investor.  To complicate the matter further, the Trepp Report indicates that 200 more banks will fail in 2010.  These banks are carrying $170 billion in assets.

The bottom line is that investors who have procured financing or who have established successful commercial loan repayment histories will see many opportunities to acquire valuable holdings.  The key is to make sure that existing tenants are solid and to line up new tenants in advance of the closing.  At the prices these investors can expect to pay for property, they may be able to offer favorable rents that will assure long-term leases.

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Today’s real estate investor knows there is opportunity on the table.  The investor also knows that sellers are often in stressful and painful situations.  As a result, some investors are waiting until banks step in and foreclose.  Meanwhile, homeowners who might find help are hesitant to approach mortgage holders to research alternative possibilities.  These reservations actually cost everybody money.

Frankly, the short sale is a better alternative than foreclosure and while banks may not be thrilled with the takeout offer, it just might be their best alternative.  Earlier in the year, short sales were failing and pending short sales were not closing.  The two primary reasons for this were that banks were taking too long to accept offers and that buyers were unwilling to wait for the long acceptance delays.  In many cases, their financing commitments expired.

Banks now understand that foreclosure is expensive.  These lenders are hesitant to absorb losses on their stockholder’s behalf, but foreclosures have become a way of life so banks are learning that in many cases, short sales make sense and save money.

Even before today’s massive unemployment, 42% of American households did not have enough liquid assets to support themselves for three successive months.  46% of American households had less than $5,000 in liquid assets before the recession.

The likelihood of a successful short sale really depends upon the seller’s ability to negotiate with the lender in advance of the transaction.  The seller who states their intention and presents the lender with a completed hardship package can pave the way for a short sale.  The investor should also do their homework and compile a short sale purchasing kit complete with a description of investment strategy, balance sheets, tax returns and pre-commitment financing. 

The more prepared the investor is, the more likely the approval is.  The quicker the approval, the quicker the seller can start rebuilding their credit and the lower the loss by the lender.     

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A short sale seller and a real estate agent should work closely together.  The seller must understand that the lender is not obligated to accept a short sale offer.  There are certain steps that need to be followed to qualify the property for a release.  Mortgage holders understand, especially today with falling home values and disturbing employment numbers, the need to consider short sales and the ensuing losses.

Experienced real estate agents know how to build a case for the short sale.  However, at some point, there are legal, credit and tax considerations that accompany every short sale.  Sellers should discuss the short sale repercussions with an accountant and/or attorney.

The seller needs to know a reasonable selling price for the subject short sale.  The fact is that many of the residences in today’s market are under water, meaning that the mortgage amount exceeds the property value.  Lenders need to be able to justify short sales and it is up to the seller and the real estate agent to build a strong case supporting the short sale application.

The following documents should be part of the short sale application.

·                     Letter of Authorization – this letter will authorize the agent to discuss the possibility of a short sale with the lender.  The letter should contain the address of the subject property, the name of the seller and the loan number.  Include the agent’s name, address and contact information.

·                     Preliminary Net Sheet – This is a sheet reflecting the proposed selling price and all closing costs as well as secured loan amounts.  Include outstanding loan payments and late fees.

·                     Hardship letter – A statement of facts conveying the facts surrounding the seller’s hardship.  Pour it on.

·                     Proof of Income and Assets – a true representation of the seller’s financial condition.  Be truthful and provide as much substantive material as possible.

·                     Copies of Bank Statement – Include recent copies of every banking and securities account.

·                     Comparative Market Analysis – Have the real estate agent show the property’s true value by including details of recent transactions of comparable properties.  This is a critical component of the process. Include pending sales, current active listings and closings for the past six months.

The lender needs to know that the property is not worth the amount of the mortgage and that over time, the condition could worsen.  The real estate agent should be able to build a strong case.

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Real estate agents and real estate investors know that change is happening.  Market trends are unusual and new real estate opportunities and lending policies are occurring almost daily.  Agents and investors know opportunities are out there but getting through the paperwork can be challenging and test anyone’s patience.

Jim Sahnger, a mortgage broker in Jupiter, Florida, a hotbed of real estate activity prior to the recession, laughs when describing a client who received a surprising mortgage approval in 2007.  The prospective borrower filed an application for a mortgage on a property and had no down payment, a history of foreclosure and a bankruptcy.  Yet, the applicant was approved fro a substantial mortgage.

Today, that applicant would stand no chance.  While every lender has slightly different criteria, it is safe to say that the no down payment days are over, as are the days of loose credit standards and loose appraisal practices.  Lenders are cautious and are obligated to create performing loans. 

Purchasers should expect that every mortgage application must stand on its own merits.  Today’s lenders require substantive documentation about every detail.  Purchasers should expect to furnish bank statements, tax returns, balance sheets and job histories.  Even with all this information, more details may be required.

Additionally, purchasers and their agents have become accustomed to changes by the appraisers, many of whom are criticized for loose work during the boom years between 2005 and 2006.  Suffice it to say that appraisers now lean to the conservative side. 

Appraisers are looking at location and especially recent transactions in those areas.  If the area of the subject property has a history of short sales or foreclosures, the value of the purchased property can be impacted.

The new, conservative appraiser and conservative lender actually work to the benefit of the experience agent and investor.  Investors should pre-qualify for investment properties.  A pre-qualification letter goes a long way toward influencing a seller or third party lender in a short sale.  Agents should encourage investors to acquire the credit approval prior to searching for property.  That pre-qualification letter can well add to the possibility of creating solid opportunities for real estate profit.

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In 2009, housing was more affordable than at any time in the past 20 years.  2009 was also supported by many government initiatives like the 2009 first time homebuyer tax credit, which has been extended through March 2010 as well as by other support plans for state and local government.  Unfortunately, the loan modification program has not been received well by the public or by lenders.

In the major markets in the U.S., only Pittsburgh PA shows a gain in housing values during 2009.  Median selling prices in Pittsburgh rose to $114,750 and are projected to rise by 0.41% in 2010 with another projected increase of 2.23% in 2011.  

There are several cities where prices should rise in 2010, but overall 2010 predictions call for a 5-10% decline.  Areas like Rochester New York, Little Rock Arkansas, Memphis Tennessee and Albuquerque New Mexico are expected to rise significantly in 2010.

Overall the projections for California, Florida, Nevada and Arizona are lower.  The Midwest and specifically Kansas, the Dakotas and Nebraska are expected to see a rise in housing demand and prices.

In 2009, Jacksonville was the most stable of the tumultuous Florida market, where renting is in far greater demand than purchasing.  Jacksonville housing process fell by 22.31% settling at a median selling price of $145,250.  Miami 2009 prices continued a ferocious slide with median prices settling at $183,530.  Even high-end West Palm Beach showed a downturn with the median selling price dipping to $223,470.

The 2009 real estate market shows signs of stabilization.  Assisted by aggressive government initiatives and by broader acceptance of short sales, the market still showed good sales volume.  Toward the end of the year, more short sales began to close.  In the beginning of the year, the short sale process was cumbersome.  Many real estate agents did not fully understand the process.  The National Association of Realtors has offered further education and training programs for agents entering the short sale marketplace.  It is estimated that almost one third of 2009 transactions were foreclosures or short sales.

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